UNIVERSITY CASEBOOK SERIES®
CONTRACTS
CASES AND MATERIALS
EIGHTH EDITION
by
E. ALLAN FARNSWORTH
Late Alfred McCormack Professor of Law
Columbia University
CAROL SANGER
Barbara Aronstein Black Professor of Law
Columbia University
NEIL B. COHEN
Jeffrey D. Forchelli Professor of Law
Brooklyn Law School
RICHARD R.W. BROOKS
Charles Keller Beekman Professor of Law
Columbia Law School
LARRY T. GARVIN
Lawrence D. Stanley Professor of Law
Ohio State University
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BASES FOR ENFORCING PROMISES
CH. 1
PROBLEM
Reviewing the Situation. Grateful for various forms of personal assistance
(driving, shopping, companionship) received from a close friend over the years,
Jack Tallas, a retired businessman, wrote out a memorandum stating his intention to change his will to make the friend “an heir for the sum of $50,000.”
Tallas had the memorandum notarized and gave a notarized copy of the memo
to his friend to keep. When Tallas died never having changed his will, the
friend sued his estate for $50,000. Assuming, as the court did, that there was
no fraud, duress, or misrepresentation, is there any legal basis to support the
friend’s claim? Consideration? Moral obligation? The writing? The notarization?
If your answer is “None of the above,” why should the promise not be enforced?
Is the concern that the cautionary or evidentiary functions performed by consideration, p. 31 above, have not been met? Is there more Tallas could have
done? See DeMentas v. Tallas, 764 P.2d 628 (Utah 1988).
SECTION 4.
RELIANCE AS A BASIS OF ENFORCEMENT
We have already considered reliance as one interest a court might protect when providing a remedy to an aggrieved promisee. The focus in this
section, however, is not on reliance as a form of relief, but rather as a theory for enforcing promises in the first place. Here we examine the role of reliance—a change of position by the promisee—as a basis for enforcement of
the promise separate and distinct from consideration. As we shall see, recognizing this function of reliance serves to ameliorate injustices that sometimes result from a want of consideration. Consider Mrs. Feinberg, or Sister Antillico, on pp. 48 and 58, respectively. At the same time, by abandoning the requirement of consideration, the doctrine of reliance may risk unfair or unsatisfactory outcomes. In reading the following cases, compare the
advantages and limitations offered by reliance as a ground for enforcing
promises with those offered by consideration.
Ricketts v. Scothorn
Supreme Court of Nebraska, 1898.
57 Neb. 51, 77 N.W. 365.
■ SULLIVAN, J. In the District Court of Lancaster county, the plaintiff,
Katie Scothorn, recovered judgment against the defendant, Andrew D.
Ricketts, as executor, of the last will and testament of John C. Ricketts,
deceased. The action was based upon a promissory note, of which the following is a copy: “May the first, 1891. I promise to pay to Katie Scothorn on
demand, $2,000 to be at 6 per cent. per annum. J.C. Ricketts.” In the petition the plaintiff alleges that the consideration for the execution of the note
was that she should surrender her employment as bookkeeper for Mayer
Bros., and cease to work for a living. She also alleges that the note was given to induce her to abandon her occupation, and that, relying on it, and on
the annual interest, as a means of support, she gave up the employment in
which she was then engaged. These allegations of the petition are denied by
the administrator.
The material facts are undisputed. They are as follows: John C. Ricketts, the maker of the note, was the grandfather of the plaintiff. Early in
May—presumably on the day the note bears date—he called on her at the
store where she was working. What transpired between them is thus de-
CH. 1
BASES FOR ENFORCING PROMISES
scribed by Mr. Flodene, one of the plaintiff’s witnesses: “A. Well, the old
gentleman came in there one morning about nine o’clock, probably a little
before or a little after, but early in the morning, and he unbuttoned his
vest, and took out a piece of paper in the shape of a note; that is the way it
looked to me; and he says to Miss Scothorn, ‘I have fixed out something
that you have not got to work any more.’ He says, ‘none of my grandchildren work, and you don’t have to.’ Q. Where was she? A. She took the piece
of paper and kissed him, and kissed the old gentleman, and commenced to
cry.” It seems Miss Scothorn immediately notified her employer of her intention to quit work, and that she did soon after abandon her occupation.
The mother of the plaintiff was a witness, and testified that she had a conversation with her father, Mr. Ricketts, shortly after the note was executed,
in which he informed her that he had given the note to the plaintiff to enable her to quit work; that none of his grandchildren worked, and he did not
think she ought to. For something more than a year the plaintiff was without an occupation, but in September, 1892, with the consent of her grandfather, and by his assistance, she secured a position as bookkeeper with
Messrs. Funke & Ogden. On June 8, 1894, Mr. Ricketts died. He had paid
one year’s interest on the note, and a short time before his death expressed
regret that he had not been able to pay the balance. In the summer or fall
of 1892 he stated to his daughter, Mrs. Scothorn, that if he could sell his
farm in Ohio he would pay the note out of the proceeds. He at no time repudiated the obligation.
We quite agree with counsel for the defendant that upon this evidence
there was nothing to submit to the jury, and that a verdict should have
been directed peremptorily for one of the parties. The testimony of Flodene
and Mrs. Scothorn, taken together, conclusively establishes the fact that
the note was not given in consideration of the plaintiff pursuing, or agreeing to pursue, any particular line of conduct. There was no promise on the
part of the plaintiff to do, or refrain from doing, anything. Her right to the
money promised in the note was not made to depend upon an abandonment
of her employment with Mayer Bros., and future abstention from like service. Mr. Ricketts made no condition, requirement, or request. He exacted
no quid pro quo. He gave the note as a gratuity, and looked for nothing in
return. So far as the evidence discloses, it was his purpose to place the
plaintiff in a position of independence, where she could work or remain idle,
as she might choose. The abandonment by Miss Scothorn of her position as
bookkeeper was altogether voluntary. It was not an act done in fulfillment
of any contract obligation assumed when she accepted the note.
The instrument in suit, being given without any valuable consideration, was nothing more than a promise to make a gift in the future of the
sum of money therein named. Ordinarily, such promises are not enforceable, even when put in the form of a promissory note. . . . But it has often
been held that an action on a note given to a church, college, or other like
institution, upon the faith of which money has been expended or obligations
incurred, could not be successfully defended on the ground of a want of consideration. . . . In this class of cases the note in suit is nearly always spoken of as a gift or donation, but the decision is generally put on the ground
that the expenditure of money or assumption of liability by the donee on
the faith of the promise constitutes a valuable and sufficient consideration.
It seems to us that the true reason is the preclusion of the defendant, under
the doctrine of estoppel, to deny the consideration. . . .
93
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BASES FOR ENFORCING PROMISES
CH. 1
Under the circumstances of this case, is there an equitable estoppel
which ought to preclude the defendant from alleging that the note in controversy is lacking in one of the essential elements of a valid contract? We
think there is. An estoppel in pais is defined to be “a right arising from
acts, admissions, or conduct which have induced a change of position in accordance with the real or apparent intention of the party against whom
they are alleged.” Mr. Pomeroy has formulated the following definition:
“Equitable estoppel is the effect of the voluntary conduct of a party whereby
he is absolutely precluded, both at law and in equity, from asserting rights
which might, perhaps, have otherwise existed, either of property, of contract, or of remedy, as against another person who in good faith relied upon
such conduct, and has been led thereby to change his position for the worse,
and who on his part acquires some corresponding right, either of property,
of contract, or of remedy.” 2 Pom. Eq. Jur. 804.According to the undisputed
proof, as shown by the record before us, the plaintiff was a working girl,
holding a position in which she earned a salary of $10 per week. Her grandfather, desiring to put her in a position of independence, gave her the note,
accompanying it with the remark that his other grandchildren did not
work, and that she would not be obliged to work any longer. In effect, he
suggested that she might abandon her employment, and rely in the future
upon the bounty which he promised. He doubtless desired that she should
give up her occupation, but, whether he did or not, it is entirely certain that
he contemplated such action on her part as a reasonable and probable consequence of his gift. Having intentionally influenced the plaintiff to alter
her position for the worse on the faith of the note being paid when due, it
would be grossly inequitable to permit the maker, or his executor, to resist
payment on the ground that the promise was given without consideration.
The petition charges the elements of an equitable estoppel, and the evidence conclusively establishes them. If errors intervened at the trial, they
could not have been prejudicial. A verdict for the defendant would be unwarranted. The judgment is right, and is
Affirmed.
NOTES
(1) Questions. What was the promise upon which Scothorn relied? What
form did her reliance take? What if, during the brief exchange between Ricketts
and Scothorn, Ricketts had not mentioned work at all, but had simply handed
his granddaughter the promissory note? What result if the conversation took
place as it did, and Scothorn decided to keep on working but relied on the promise by buying a horse so that she could get to work more conveniently? Might
another court have found a bargained-for exchange and so have enforced Ricketts’s note as a promise supported by consideration? Compare, particularly,
Hamer v. Sidway, p. 35 above. How might Ricketts have structured his promise
so as to ensure its enforcement?
(2) Equitable versus Promissory Estoppel. In the last paragraph of the
Ricketts decision, the court states that the evidence “conclusively establishes”
the elements of an equitable estoppel claim; the court quotes a passage from
the Pomeroy treatise (“Mr. Pomeroy”) stating that a crucial element of equitable estoppel is that the plaintiff has relied upon “an act, admission, or conduct”
by the defendant--that is to say, a representation of fact which causes the plaintiff to change her position. But in Ricketts, Katie relied not upon a representation of fact, but upon her grandfather’s promise: hence the term promissory
CH. 1
BASES FOR ENFORCING PROMISES
estoppel. For a good discussion of the difference between equitable and promissory estoppel, see Youngblood v. Auto–Owners Ins. Co., 158 P.3d 1088 (Utah
2007).
Why is the court in Ricketts not more explicit about what it is doing: that
is, expanding the nature of conduct upon which another may rely at law from
statements of fact to mere promises? The next section on the development of
promissory estoppel suggests some answers. Consider why the four categories
of promises discussed below might have been particularly agreeable or sympathetic to courts as they honed this new category of enforceable promises.
———
THE DEVELOPMENT OF PROMISSORY ESTOPPEL
Holmes said, “It would cut up the doctrine of consideration by the
roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it.” Commonwealth v. Scituate Savings Bank,
137 Mass. 301, 302 (1884). Nevertheless, a number of 19th and early 20th
century cases, including Ricketts, recognized reliance as a basis for the enforcing of promises. For the most part, these cases fall into the following
four categories.
Family Promises. As in Ricketts, a promise is made by one family
member to another, on which the other relies. In earlier centuries, many
such cases involved a parent’s promise to leave the family farm to the son if
the son stays and works the property, or to the daughter if she doesn’t marry but cares for her aging parents instead. For a catalogue of such cases
and an analysis of why such promises traditionally failed as enforceable
contracts, see Hendrik Hartog, Someday This Will All Be Yours: Inheritance, Adoption, and Obligation in Capitalist America, 79 Ind. L.J. 345
(2004).
Promises to Convey Land. The recipient of a promise to convey land relied on it by moving onto the land and making improvements. An early example is Freeman v. Freeman, 43 N.Y. 34 (1870). Would the facts in
Kirksey, above, have brought that case within this category?
Promises Coupled with Gratuitous Bailments. A person to whom the
owner of something entrusts its possessions makes a promise to the owner
respecting the property, on which the owner relies. The leading case is
Siegel v. Spear & Co., 138 N.E. 414 (N.Y.1923). Siegel bought furniture on
credit from Spear, giving Spear a mortgage on it and agreeing not to remove it from his apartment without Spear’s consent until it was paid for.
When he decided to leave the city for the summer, Siegel saw Spear’s credit
man, McGrath, who agreed to store the furniture free of charge. When
Siegel stated that he would first have to get some property insurance,
McGrath responded that it wouldn’t be necessary: “I will do it for you; it
will be a good deal cheaper; . . . when you get the next bill—you can send a
check for that with the next installment.” Siegel then sent the furniture to
Spear’s storehouse, where a month later it was destroyed by fire. It had not
been insured. Siegel sued Spear, won, and Spear appealed. The Court of
Appeals affirmed. Although the gratuitous bailment itself imposed no duty
on Spear to insure the furniture, such a duty arose from McGrath’s promise
followed by the delivery of the furniture by Siegel.
95
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BASES FOR ENFORCING PROMISES
CH. 1
Charitable Subscriptions. A person promises to contribute to a not-forprofit organization. Enforcement of such promises may be desirable for policy reasons. As one court put it,
This promise was made to a charitable corporation, and for that
reason we are not confined to the same orthodox concepts which once
were applicable to every situation arising within a common law jurisdiction. There can be no denying that the strong desire on the part of
the American courts to favor charitable institutions has established a
doctrine which once would have been looked upon as legal heresy.
Danby v. Osteopathic Hosp. Ass’n of Delaware, 104 A.2d 903, 904
(Del.Ch.1954). Courts have sometimes enforced promises to charities by
finding an exchange among subscribers of promises for the benefit of (and
enforceable by) the charitable organization, especially when one subscriber
appears as the “bellwether” of the flock and has promised a large sum on
the condition that other subscribers raise a specified amount. See Congregation B’Nai Sholom v. Martin, 173 N.W.2d 504 (Mich.1969). (How could
you draft a pledge form to help your favorite charity take advantage of this
possibility?) Charitable subscriptions have also been enforced by finding
that the charity has done or has promised to do something in exchange for
the subscriber’s promise.
The most widely-known and influential decision on charitable subscriptions rests on this last ground and contains only dictum concerning the
effect of reliance. The case is Allegheny College v. National Chautauqua
County Bank of Jamestown, 159 N.E. 173 (N.Y.1927). Mary Yates Johnston
promised to pay $5,000 to Allegheny College by a writing denoted an “Estate Pledge” that stipulated that “this gift shall be known as the Mary
Yates Johnston memorial fund, the proceeds from which shall be used to
educate students preparing for the ministry.” The sum was not payable until 30 days after her death, but $1,000 was paid while she was alive and set
aside by the college for the specified purpose. She later repudiated her
promise, and after her death, the college brought an action against her executor for the unpaid balance.
Writing for the New York Court of Appeals, Cardozo found consideration for her promise in the return promise of the college to set up the memorial fund which arose “by implication” from its acceptance of the $1,000.
“The college could not accept the money and hold itself free thereafter from
personal responsibility to give effect to the condition.” Id. at 175. In the
course of his opinion, Cardozo went out of his way to speak to the effect of
reliance.
[T]here has grown up of recent days a doctrine that a substitute
for consideration or an exception to its ordinary requirements can be
found in what is styled ‘a promissory estoppel’. . . . Whether the exception has made its way in this state to such an extent as to permit
us to say that the general law of consideration has been modified accordingly, we do not now attempt to say. Cases such as Siegel v.
Spear & Co., the bailment case discussed above, may be signposts on
the road. Certain, at least, it is that we have adopted the doctrine of
promissory estoppel as the equivalent of consideration in connection
with our law of charitable subscriptions.
Id. For a detailed account of the case, see Alfred S. Konefsky, How to Read,
or at Least Not Misread, Cardozo in the Allegheny College Case, 36 Buffalo
CH. 1
BASES FOR ENFORCING PROMISES
L. Rev. 645 (1987); see also Leon Lipson, The Allegheny College Case, 23
Yale L. Rep. No. 3, 11 (1977).
———
RESTATEMENT, FIRST, § 90
Cardozo’s dictum in Allegheny College was surely influenced by what
was to become Restatement, First, § 90, whose text had been considered at
the annual meeting of the American Law Institute in 1926—in a session
presided over by Cardozo, Vice-President of the ALI. The section reads:
§ 90. Promise Reasonably Inducing Definite and Substantial Action
A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part
of the promisee and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise.
Although the section avoids the use of the term “promissory estoppel,” it
states in general terms the principle that had been applied in the four categories of cases just described. During the discussion of Restatement, First,
§ 90 on the floor of the American Law Institute, Samuel Williston, as Reporter, stated:
Either the promise is binding or it is not. If the promise is binding it
has to be enforced as it is made. As I said to Mr. Coudert, I could
leave this whole thing to the subject of quasi contracts so that the
promisee under those circumstances shall never recover on the promise but he shall recover such an amount as will fairly compensate him
for any injury incurred; but it seems to me you have to take one leg or
the other. You have either to say the promise is binding or you have
to go on the theory of restoring the status quo.
4 American Law Institute Proceedings, Appendix, 103–04 (1926).
Do you agree with Williston?
Feinberg v. Pfeiffer Co.
Saint Louis Court of Appeals, Missouri, 1959.
322 S.W.2d 163.
[The facts and the first part of the opinion in this case are at p. 48 above.
The court there rejected Mrs. Feinberg’s contention that her continuation
in the employ of Pfeiffer Co. from December 27, 1947, the date of the resolution, until her retirement on June 30, 1949, was consideration for
Pfeiffer’s promise to pay her $200 per month for life upon her retirement.
In this portion of the opinion, the court considered Mrs. Feinberg’s second
contention that the company’s promise was enforceable because of her reliance on it, “i.e., her retirement, and the abandonment by her of her opportunity to continue in gainful employment.”]
■ DOERNER, COMMISSIONER. . . . But as to the second of these contentions
we must agree with plaintiff. By the terms of the resolution defendant
promised to pay plaintiff the sum of $200 a month upon her retirement.
[The court quoted Restatement, First, § 90.] Was there such an act on
the part of plaintiff, in reliance upon the promise contained in the resolution, as will estop the defendant, and therefore create an enforceable con-
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BASES FOR ENFORCING PROMISES
CH. 1
tract under the doctrine of promissory estoppel? We think there was. One of
the illustrations cited under Section 90 of the Restatement is: “2. A promises B to pay him an annuity during B’s life. B thereupon resigns a profitable
employment, as A expected that he might. B receives the annuity for some
years, in the meantime becoming disqualified from again obtaining good
employment. A’s promise is binding.” This illustration is objected to by defendant as not being applicable to the case at hand. The reason advanced
by it is that in the illustration B became “disqualified” from obtaining other
employment before A discontinued the payments, whereas in this case the
plaintiff did not discover that she had cancer and thereby became unemployable until after the defendant had discontinued the payments of $200
per month. We think the distinction is immaterial. The only reason for the
reference in the illustration to the disqualification of A is in connection
with that part of Section 90 regarding the prevention of injustice. The injustice would occur regardless of when the disability occurred. Would defendant contend that the contract would be enforceable if the plaintiff’s illness had been discovered on March 31, 1956, the day before it discontinued
the payment of the $200 a month, but not if it occurred on April 2nd, the
day after? Furthermore, there are more ways to become disqualified for
work, or unemployable, than as the result of illness. At the time she retired
plaintiff was 57 years of age. At the time the payments were discontinued
she was over 63 years of age. It is a matter of common knowledge that it is
virtually impossible for a woman of that age to find satisfactory employment, much less a position comparable to that which plaintiff enjoyed at
the time of her retirement.
The fact of the matter is that plaintiff’s subsequent illness was not the
“action or forbearance” which was induced by the promise contained in the
resolution. As the trial court correctly decided, such action on plaintiff’s
part was her retirement from a lucrative position in reliance upon defendant’s promise to pay her an annuity or pension. [The court quoted from
Ricketts v. Scothorn, p. 92 above.]
The Commissioner therefore recommends, for the reasons stated, that
the judgment be affirmed.
■ PER CURIAM. The foregoing opinion is adopted as the opinion of the court.
The judgment is, accordingly, affirmed.
PROBLEM
Parallel Pension Promise? In January, 1972, Edward J. Hayes announced
his intention to retire from Plantations Steel the following July after 25 years
of continuous service. About a week before his retirement, he had a conversation with a Plantations Steel officer who said that though Hayes was not eligible for a pension, the company “would take care” of him. Hayes retired and
sought no other employment, and the company paid him $5,000 a year through
1976. When payments were discontinued on the ground that the promise was
unsupported by consideration, Hayes sued, relying on Feinberg. What result?
Do the facts in Hayes’s case differ significantly from those in Feinberg’s? Hayes
v. Plantations Steel Co., 438 A.2d 1091 (R.I.1982).
———
CH. 1
BASES FOR ENFORCING PROMISES
RESTATEMENT, SECOND, § 90
In view of the great influence § 90 of the Restatement, First, has had
on the enforcement of promises, § 90 of the Restatement, Second, (otherwise simply referred to as the Restatement herein) set out below, merits
particularly careful reading. What has happened to the Restatement,
First’s requirement that the reliance be of “a definite and substantial character”? Is there a relation between this deletion and the addition of the second sentence in (1)? Note also the liberalization in Subsection (2) of the
rule as to charitable subscriptions.
§ 90.
Promise Reasonably Inducing Action or Forbearance
(1) A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promisee or a third person and
which does induce such action or forbearance is binding if injustice can
be avoided only by enforcement of the promise. The remedy granted for
breach may be limited as justice requires.
(2) A charitable subscription or a marriage settlement is binding under
Subsection (1) without proof that the promise induced action or forbearance.
NOTES
(1) Remedies and the Requirements of Justice. Fuller and Perdue posed the
following case:
An uncle promises his nephew $1,000 as a gift. The nephew decides to go
into business, and, reserving the promised sum for use in paying his rent,
spends a large sum of money laying in a stock of goods. The uncle declines
to perform his promise; the nephew is forced to abandon his plans, and
sells his stock of goods at a sacrifice of $2,000.
See Lon L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract
Damages, 46 Yale L.J. 52, 80 (1936).
How much should the nephew recover in the preceding hypothetical?
(2) Charitable Subscriptions Revisited. Reread (2) of Restatement, Second,
§ 90 above. How does (2) differ from Cardozo’s dictum in Allegheny College, at
p. 96 above? Does it suggest that all promises made to charities are now enforceable? In fact, the state of the law on charitable subscriptions remains unsettled; most jurisdictions have not even addressed the matter.
For an example of a court that continues to require reliance, see King v.
Trustees of Boston Univ., 647 N.E.2d 1196 (Mass.1995), involving the ownership of the papers of Dr. Martin Luther King, Jr. In a 1964 letter, Dr. King
named the Boston University Library as the repository of his papers, and authorized their removal to Boston University. His letter stated further that “In
the event of my death, all such materials deposited with the University shall
become from that date the absolute property of Boston University.” Id. at 1999.
Coretta Scott King, Dr. King’s widow, later sought to recover his papers on the
ground that his statement was at best a gratuitous promise. A Massachusetts
jury found for the University and King appealed. Held: Affirmed.
The court held that either consideration or reliance was required and that
the jury could have concluded that the University’s efforts in caring for the papers constituted reliance on Dr. King’s promise to transfer ownership of the
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BASES FOR ENFORCING PROMISES
CH. 1
papers at the time of his death. King v. Trustees of Boston University, 647
N.E.2d 1196 (Mass.1995). Might the University have shown other forms of reliance on their possession of the papers? For a case in which the same court
found no injustice in declining to enforce an oral promise to give $25,000 to a
synagogue, see Congregation Kadimah Toras–Moshe v. DeLeo, 540 N.E.2d 691
(Mass.1989)
(3) Decline and Fall. In the provocatively titled The Death of Contract, Professor Grant Gilmoreo described the “decline and fall” of “the general theory of
contract,” as espoused by Langdell, Holmes, and Williston. He referred to “the
Restatement’s schizophrenia” and quoted from the Restatement, First, § 75
(found in Feinberg v. Pfeiffer Co. at p. 97 above), and Restatement, First, § 90
(p. 99 above).
Perhaps what we have here is Restatement and anti-Restatement or
Contract and anti-Contract. . . . The one thing that is clear is that these
two contradictory propositions cannot live comfortably together: in the
end one must swallow the other up. . . . Clearly enough the unresolved
ambiguity in the relationship between [the two sections] has now been
resolved in favor of the promissory estoppel principle of § 90 which has,
in effect, swallowed up the bargain principle of § 75. The wholly
executory exchange where neither party has yet taken any action would
seem to be the only situation in which it would be necessary to look to
§ 75—and even there, as the Comment somewhat mysteriously suggests,
the ‘probability of reliance’ may be a sufficient reason for enforcement
without inquiring into whether or not there was any ‘consideration.’ . . .
Speaking descriptively, we might say that what is happening is that ‘contract’ is being reabsorbed into the mainstream of ‘tort.’
Grant Gilmore, The Death of Contract 61–65, 72, 87 (1974).
Gilmore’s remark about the “wholly executory exchange where neither
party has yet taken any action” has not gone unnoticed. An English contracts
scholar, Professor Patrick Atiyah, has argued that the case for enforcing such
exchanges is not compelling and that “there are signs of an increasing reluctance to impose liability in wholly executory contracts, that is, on promises
which have neither been paid for, nor relied upon.” Patrick S. Atiyah, Promises,
Morals and Law 5–6 (1981). Can you find any of those signs? See Melvin Eisenberg, The Bargain Principle and Its Limits, 95 Harv. L. Rev. 741 (1982).
PROBLEM
Applied Measures of Recovery. Assuming that each of the following plaintiffs were allowed to recover under the rule stated in Restatement § 90, which
of them might appropriately be limited to recovery based on the reliance interest? Katie Scothorn? Anna Feinberg? Antillico Kirksey?
———
o
Grant Gilmore (1910–1982), once a teacher of French, practiced law in New York for
two years before teaching law at Yale and for some years at Chicago. He was a principal architect of Article 9 of the Uniform Commercial Code, which deals with secured transactions, and
wrote a two-volume work on that subject as well as shorter works on admiralty, contracts, and
legal history.
CH. 1
BASES FOR ENFORCING PROMISES
Wright v. Newman
Supreme Court of Georgia, 1996.
266 Ga. 519. 467 S.E. 533.
■ CARLEY, JUSTICE. Seeking to recover child support for her daughter and
her son, Kim Newman filed suit against Bruce Wright. Wright’s answer
admitted his paternity only as to Newman’s daughter and DNA testing
subsequently showed that he is not the father of her son. The trial court
nevertheless ordered Wright to pay child support for both children. As to
Newman’s son, the trial court based its order upon Wright’s “actions in having himself listed on the child’s birth certificate, giving the child his surname and establishing a parent-child relationship. . . . ” According to the
trial court, Wright had thereby allow[ed] the child to consider him his father and in so doing deterr[ed Newman] from seeking to establish the paternity of the child’s natural father [,] thus denying the child an opportunity to establish a parent-child relationship with the natural father.
We granted Wright’s application for a discretionary appeal so as to review the trial court’s order requiring that he pay child support for Newman’s son. Wright does not contest the trial court’s factual findings. He asserts only that the trial court erred in its legal conclusion that the facts authorized the imposition of an obligation to provide support for Newman’s
son. If Wright were the natural father of Newman’s son, he would be legally
obligated to provide support. OCGA § 19–7–2. Likewise, if Wright had formally adopted Newman’s son, he would be legally obligated to provide support. OCGA § 19–8–19(a)(2). However, Wright is neither the natural nor
the formally adoptive father of the child and “the theory of ‘virtual adoption’ is not applicable to a dispute as to who is legally responsible for the
support of minor children.” Ellison v. Thompson, 240 Ga. 594, 596, (1978).
Although Wright is neither the natural nor the formally adoptive father of Newman’s son . . ., it does not necessarily follow that, as a matter of
law, he has no legal obligation for child support. A number of jurisdictions
have recognized that a legally enforceable obligation to provide child support can be “based upon parentage or contract. . . . ” (Emphasis supplied.)
Albert v. Albert, 415 So.2d 818, 819 (Fla.App.1982). Georgia is included
among those jurisdictions. Foltz v. Foltz, 238 Ga. 193, 194, 232 S.E.2d 66
(1977). Accordingly, the issue for resolution is whether Wright can be held
liable for child support for Newman’s son under this state’s contract law.
There was no formal written contract whereby Wright agreed to support Newman’s son. Nevertheless, under this state’s contract law, [a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only
by enforcement of the promise. The remedy granted for breach may be limited as justice requires. OCGA § 13–3–44(a). This statute codifies the principle of promissory estoppel. Insilco Corp. v. First Nat. Bank of Dalton, 248
Ga. 322(1), (1981). In accordance with that principle, “[a] party may enter
into a contract invalid and unenforceable, and by reason of the covenants
therein contained and promises made in connection with the same, wrongfully cause the opposite party to forego a valuable legal right to his detriment, and in this manner by his conduct waive the right to repudiate the
contract and become estopped to deny the opposite party any benefits that
may accrue to him under the terms of the agreement.” Pepsi Cola Bottling
101
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BASES FOR ENFORCING PROMISES
CH. 1
Co. of Dothan, Ala., Inc. v. First Nat. Bank of Columbus, 248 Ga. 114, 116–
117(2), (1981).
The evidence authorizes the finding that Wright promised both Newman and her son that he would assume all of the obligations and responsibilities of fatherhood, including that of providing support. As the trial court
found, this promise was evidenced by Wright’s listing of himself as the father on the child’s birth certificate and giving the child his last name.
Wright is presumed to know “the legal consequences of his actions. Since
parents are legally obligated to support their minor children, [he] accepted
this support obligation by acknowledging paternity.” Marshall v. Marshall,
386 So.2d 11, 12 (Fla.App.1980). There is no dispute that, at the time he
made his commitment, Wright knew that he was not the natural father of
the child. Compare NPA v. WBA, 8 Va.App. 246, 380 S.E.2d 178 (1989).
Thus, he undertook his commitment knowingly and voluntarily. Moreover,
he continued to do so for some 10 years, holding himself out to others as the
father of the child and allowing the child to consider him to be the natural
father.
The evidence further authorizes the finding that Newman and her son
relied upon Wright’s promise to their detriment. As the trial court found,
Newman refrained from identifying and seeking support from the child’s
natural father. Had Newman not refrained from doing so, she might now
have a source of financial support for the child and the child might now
have a natural father who provided emotional, as well as financial, support.
If, after 10 years of honoring his voluntary commitment, Wright were now
allowed to evade the consequences of his promise, an injustice to Newman
and her son would result. Under the evidence, the duty to support which
Wright voluntarily assumed 10 years ago remains enforceable under the
contractual doctrine of promissory estoppel and the trial court’s order
which compels Wright to discharge that obligation must be affirmed.
Judgment affirmed.
■ SEARS, JUSTICE, concurring. I write separately only to address the dissenting opinion’s misperception that Newman has not relied upon Wright’s
promise to her detriment. It is an established principle in Georgia that a
promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does
induce such action or forbearance is binding if injustice can be avoided only
by enforcement of the promise.
Bearing these principles in mind, and as explained very well in the
majority opinion, it is clear that Wright’s commitment to Newman to assume the obligations of fatherhood as regards her son are enforceable. Specifically, it is abundantly clear that Wright should have known that Newman would rely upon his promise, especially after he undertook for ten
years to fulfill the obligations of fatherhood. In this regard, it could hardly
have escaped Wright’s notice that Newman refrained from seeking to identify and obtain support from the child’s biological father while Wright was
fulfilling his commitment to her.
Promissory estoppel requires only that the reliance by the injured party be reasonable. Moreover, contrary to the dissent’s implicit assertion,
promissory estoppel does not require that the injured party exhaust all other possible means of obtaining the benefit of the promise from any and all
sources before being able to enforce the promise against the promisor. In
this regard, it is illogical to argue that Newman, after reasonably relying
CH. 1
BASES FOR ENFORCING PROMISES
upon Wright’s promise for ten years, can now simply seek to determine the
identity of the biological father and collect support from him. . . . This requirement would be an imposing, if not an impossible, burden, and would
require Newman not only to identify the father (if possible), but also to locate him, bring a costly legal action against him, and to succeed in that action.
Finally, there can be no doubt that, unless Wright’s promise to Newman is enforced, injustice will result. Given the approximately ten years
that have passed since the child’s birth, during which time Wright, for all
purposes, was the child’s father, it likely will be impossible for Newman to
establish the identity of the child’s biological father, bring a successful paternity action, and obtain support from that individual. Consequently, if
Wright is allowed to renege on his obligation, Newman likely will not receive any support to assist in the cost of raising her son, despite having
been promised the receipt of such by Wright. Furthermore, an even greater
injustice will be inflicted upon the boy himself. A child who has been told by
any adult, regardless of the existence of a biological relationship, that he
will always be able to depend upon the adult for parenting and sustenance,
will suffer a great deal when that commitment is broken. And when a child
suffers under those circumstances, society-at-large suffers as well.
Because Wright’s promise is capable of being enforced under the law,
and because I believe that Wright’s promise must be enforced in order to
prevent a grave miscarriage of justice, I concur fully in the majority opinion.
■ BENHAM, CHIEF JUSTICE, dissenting. I respectfully dissent. While I agree
with the majority opinion’s statement that liability for child support may be
based on promissory estoppel in a case where there is no statutory obligation or express contract, . . . there is a critical element that must be shown
for promissory estoppel to apply. In addition to making a showing of expectation and reasonable reliance, a person asserting liability on the theory of
promissory estoppel must show that she relied on the promise to her detriment.
The majority states that Newman and her son incurred detriment by
refraining from identifying and seeking support from the child’s natural
father. However,. . . Newman has not alleged, nor does the record reveal,
that she does not know the identity of the natural father, nor does she show
that the natural father is dead or unable to be found. Consequently, Newman has not shown that she is now unable to do what she would have had
to do ten years ago—seek support from the natural father.
In fact, Wright contends, and Newman does not refute, that Newman
severed the relationship and all ties with Wright when the child was approximately three years old. For approximately the next five years, until
the child was eight, Newman and Wright did not communicate. Only for
the past two years has Wright visited with the child. Importantly, Wright
contends that during the past seven years he did not support the child.
Thus, taking Wright’s undisputed contentions as true, any prejudice incurred by Newman because of the passage of ten years in time is not due to
Wright’s actions, since, at least for the past seven years, Newman has been
in the same situation-receiving no support payments from Wright. Thus,
although Wright may be morally obligated to support the ten-year-old
child, he is not legally obligated to do so because Newman has failed to
show that she or the child incurred any detriment by Wright’s failure to
fulfill his promise made ten years ago.
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BASES FOR ENFORCING PROMISES
CH. 1
For the foregoing reasons, I dissent.
NOTES
(1) Questions. What was the promise on which Newman was found to rely?
Was Wright’s payment of child support to Newman a case of promissory or equitable estoppel? What was the factual basis of the majority’s decision to enforce Wright’s promise in its entirety? What was the legal basis? What factual
and doctrinal concerns trouble the dissenting judge? What is the position of the
concurring judge? Is it possible to apply the last sentence of Section 90 without
finding reliance first? Is there a hint of that in the concurrence?
(2) Detriment. In discussing Section 90, courts often speak of detriment, as
in the case above, as if the promisee’s reliance were not sufficient. Does Section
90 mention “detriment”?
In Vastoler v. American Can Co., 700 F.2d 916 (3d Cir.1983), Vastoler
sued his employer for breach of a promise for greater pension benefits. Vastoler
claimed he had relied on the promise when he accepted a promotion from working as an hourly lithographer to become a salaried supervisor. The trial court
granted summary judgment for the employer on the ground that, because the
promotion had been to Vastoler’s financial advantage, there was a “complete
absence of any detriment, let alone a substantial one.” The Court of Appeals
reversed, concluding that there was “a genuine issue of material fact . . . concerning Vastoler’s detrimental reliance upon the Company’s promise.” The
court noted that Vastoler “asserted that he remained with [the] Company because of his pension benefits.” It also found “that the trial judge erred in failing
to recognize that absorption of the stress and anxiety inherent in supervisory
positions could be one of the factors that constitutes detrimental reliance.” This
explains, the court said, “why some qualified people do not want to be President
of Fortune 500 corporations, nominee for the Presidency of the United States,
or foreman of their plants.”
Was the court, in effect, applying a rule similar to that of Restatement,
Second, § 90(2)? The court in Vastoler used reliance to enforce a promise where
the plaintiff seemed to show little or no reliance. Does the case suggest that
courts may in fact be implementing the Farber and Matheson proposal discussed in the Note at p. 91?
Cohen v. Cowles Media Company
479 N.W.2d 387 (Minn.1992)
[Dan Cohen, an associate of a gubernatorial candidate, informed reporters for the Minneapolis Star and the Pioneer Press Dispatch of the arrest for unlawful assembly and the conviction for shoplifting of the opposing candidate for lieutenant governor. Although the reporters promised to
keep Cohen’s identity confidential, the newspapers’ editors overruled those
promises. When the stories were published, Cohen was fired by his advertising firm, and he sued the publishers of the papers for breach of contract.
The jury awarded Cohen $200,000 in compensatory damages, but the
Minnesota Supreme Court held that, though the papers may have had a
moral and ethical commitment to keep their source anonymous, the parties
were not thinking in terms of a legally binding contract. It also held that to
allow Cohen to recover under the doctrine of promissory estoppel would
violate the papers’ First Amendment rights. The Supreme Court of the
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BASES FOR ENFORCING PROMISES
United States granted certiorari and held that the First Amendment was
not offended by use of the doctrine to enforce confidentiality agreements
because it had only “incidental effects” on news gathering and reporting. It
remanded the case to the Supreme Court of Minnesota.
Citing Restatement § 90(1), that court affirmed the jury’s $200,000
verdict on the grounds of promissory estoppel, concluding that the promise
must “be enforced to prevent an injustice.”]
■ SIMONETT, JUSTICE. . . . It is perhaps worth noting that the test is not
whether the promise should be enforced to do justice, but whether enforcement is required to prevent an injustice. As has been observed elsewhere, it
is easier to recognize an unjust result than a just one, particularly in a
morally ambiguous situation. Cf. Edmond Cahn, The Sense of Injustice
(1964). The newspapers argue it is unjust to be penalized for publishing the
whole truth, but it is not clear this would result in an injustice in this case.
For example, it would seem veiling Cohen’s identity by publishing the
source as someone close to the opposing gubernatorial ticket would have
sufficed as a sufficient reporting of the “whole truth.”
Cohen, on the other hand, argues that it would be unjust for the law to
countenance, at least in this instance, the breaking of a promise. We agree
that denying Cohen any recourse would be unjust. What is significant in
this case is that the record shows the defendant newspapers themselves
believed that they generally must keep promises of confidentiality given a
news source. The reporters who actually gave the promises adamantly testified that their promises should have been honored. The editors who countermanded the promises conceded that never before or since have they reneged on a promise of confidentiality. A former Minneapolis Star managing
editor testified that the newspapers had “hung Mr. Cohen out to dry because they didn’t regard him very highly as a source.” The Pioneer Press
Dispatch editor stated nothing like this had happened in her 27 years in
journalism. The Star Tribune’s editor testified that protection of sources
was “extremely important.” Other experts, too, stressed the ethical importance, except on rare occasions, of keeping promises of confidentiality. It
was this long-standing journalistic tradition that Cohen, who has worked in
journalism, relied upon in asking for and receiving a promise of anonymity.
Neither side in this case clearly holds the higher moral ground, but in
view of the defendants’ concurrence in the importance of honoring promises
of confidentiality, and absent the showing of any compelling need in this
case to break that promise, we conclude that the resultant harm to Cohen
requires a remedy here to avoid an injustice. In short, defendants are liable
in damages to plaintiff for their broken promise. . . .
NOTES
(1) Questions. The case above was the second time the Supreme Court decided the matter. In its initial decision (Cohen I), the Court concluded that although “the newspapers may have had a moral and ethical commitment to keep
their sources anonymous, . . . this was not a situation where the parties were
thinking in terms of a legally binding commitment.” Do you agree? A dissenting
judge in Cohen I argued that “the news media should be compelled to keep
their promises like anyone else” and should therefore be liable “on either a contract or promissory estoppel theory.” If, as the majority suggested in Cohen I,
the newspapers’s commitment was only “moral and ethical,” was Cohen justified in relying on it?
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CH. 1
A context of bargaining for terms gives some assurance that the promisors
made them with serious intent. Reliance on a promise may well give some assurance that the recipient took it seriously, but does not demonstrate that the
promisor meant it so. Is there anything in Section 90 that warrants a court taking account of the degree of circumspection that accompanied the making of a
promise? As to the principal case, can it be doubted that both Cohen and the
reporters took seriously their promise of confidentiality? Might not their understanding be characterized as a bargain?
PROBLEM
The Ear of the Beholder. In 1977, the Township of Ypsilanti, Michigan,
created an industrial development district for General Motors’ Willow Run
plant and subsequently gave it a series of property tax abatements. Prior to the
1988 abatements, Harvey Williams, the plant manager, made the following
statement as part of General Motors’ presentation.
Good evening, my name is Harvey Williams and I am the plant manager of
the Buick Oldsmobile Cadillac group’s Willow Run plant. We are pleased
to have this opportunity to appear before the Ypsilanti Township Board of
Trustees. This application for an industrial facilities exemption certificate
is for an investment totalling $75,000,000.00 for machinery and equipment. This will enable our plant to assemble a new full size car in the
1991 model year. This new rear wheel drive car is substantially larger
than our current model. And specifically it will generate major booth, oven
and conveyor changes in the paint shop and assembly line process, changes in the body, trim and chassis department. This change will also provide
additional flexibility at our assembly plant. Essentially we would now
have the capability to produce either front or rear wheel drive cars with
minimum modifications to our facility. Upon completion of this project and
favorable market demand, it will allow Willow Run to continue production
and maintain continuous employment for our employees. I would like to
introduce Russell Hughes, our controller, who will review pertinent charts
pertaining to our request.
In 1991, General Motors announced that, because of record losses, it had
decided to consolidate the work done at Willow Run with that done at Arlington, Texas, and to close the Willow Run plant. The Township sought and obtained an injunction barring General Motors from transferring production from
the Willow Run plant, and General Motors appealed.
How would you argue the case for the Township? For General Motors?
Where in Williams’s speech do you find a promise? See Charter Township of
Ypsilanti v. General Motors Corp., 506 N.W.2d 556 (Mich.App.1993). See also
Local 1330, United Steel Workers v. United States Steel Corp., 631 F.2d 1264
(6th Cir.1980).
D & G Stout, Inc. v. Bacardi Imports, Inc.
United States Court of Appeals, Seventh Circuit, 1991.
923 F.2d 566.
■ CUDAHY, CIRCUIT JUDGE. D & G Stout, Inc., operating at all relevant
times under the name General Liquors, Inc. (General), was distributing
CH. 1
BASES FOR ENFORCING PROMISES
liquor in the turbulent Indiana liquor market in 1987. When two of its major suppliers jumped ship in early 1987, General faced a critical dilemma:
sell out at the best possible price or continue operating on a smaller scale.
It began negotiating with another Indiana distributor on the terms of a
possible sale. Bacardi Imports, Inc. (Bacardi), was still one of General’s remaining major suppliers. Knowing that negotiations were ongoing for General’s sale, Bacardi promised that General would continue to act as
Bacardi’s distributor for Northern Indiana. Based on this representation,
General turned down the negotiated selling price it was offered. One week
later, Bacardi withdrew its account. Realizing it could no longer continue to
operate, General went back to the negotiating table, this time settling for
an amount $550,000 below the first offer. The question is whether General
can recover the price differential from Bacardi on a theory of promissory
estoppel. The district court believed that as a matter of law it could not,
and entered summary judgment for defendant Bacardi. We disagree, and so
we remand for trial.
I.
General was (and D & G Stout, Inc., is) an Indiana corporation with its
main place of business in South Bend. Bacardi is a corporation organized in
New York and doing business primarily in Miami, Florida. General served
at Bacardi’s will as its wholesale distributor in Northern Indiana for over
35 years. During the 1980s, liquor suppliers in Indiana undertook an extensive effort to consolidate their distribution, the effect of which was to
reduce the number of distributors in the state from approximately twenty
in 1980 to only two in 1990.
General weathered the storm until April 1987, when two of its major
suppliers withdrew their lines, taking with them the basis of more than
fifty percent of General’s gross sales. By June, General recognized that it
must choose between selling out and scaling back operations in order to
stay in business. Despite the recent setbacks, General calculated that remaining operational was possible as long as it held on to its continuing two
major suppliers, Bacardi and Hiram Walker.
About this time (and probably in connection with the same forces concentrating distribution) Bacardi lost its distributor in Indianapolis and
southern Indiana. Bacardi decided to convene a meeting on July 9, 1987, of
applicants for the open distributorship. General’s president, David Stout,
attended the meetings as an observer, with no designs on the new opening.
Stout did intend to seek assurances from Bacardi about its commitment to
General in Northern Indiana. While in Indianapolis, Stout was approached
by National Wine & Spirits Company (National), which expressed an interest in buying General. Stout agreed to begin negotiations the following
weekend. Stout also received the assurances from Bacardi he sought: after
listening to Stout’s concerns and hearing about his contemplated sale of
General, Bacardi emphatically avowed that it had no intention of taking its
line to another distributor in Northern Indiana. This promise was openended—no one discussed how long the continuing relationship might last.
During the ensuing two weeks, General carried on negotiations with
National to reach a price for the purchase of General’s assets. Bacardi kept
in close contact with General to find out whether it would indeed sell. The
negotiations yielded a final figure for Stout to consider. On July 22 and
again on July 23—with negotiations concluded and only the final decision
remaining—Stout again sought assurances from Bacardi. The supplier unequivocally reconfirmed its commitment to stay with General, and Stout
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CH. 1
replied that, as a result, he was going to turn down National’s offer and
would continue operating. Later on the 23rd, Stout rejected National’s offer. That same afternoon, Bacardi decided to withdraw its line from General.
General learned of Bacardi’s decision on July 30. The news spread
quickly through the industry, and by August 3, Hiram Walker had also
pulled its line, expressing a belief that General could not continue without
Bacardi on board. By this time, sales personnel were abandoning General
for jobs with the two surviving distributors in Indiana (one of which was
National). General quickly sought out National to sell its assets, but National’s offer was now substantially reduced. The ensuing agreement, executed on August 14 and closed on August 28, included a purchase price
$550,000 lower than the one National offered in mid-July. Stout’s successor
company brought suit under the diversity jurisdiction against Bacardi,
claiming that the supplier was liable by reason of promissory estoppel for
this decline in the purchase price. Judge Miller entered summary judgment
for Bacardi, holding that the promises plaintiff alleged were not the type
upon which one may rely under Indiana law. Plaintiff appeals.
II.
We have generally stated General’s version of the facts, many of which
are undisputed. On appeal, Bacardi does not argue the facts and is apparently willing to rest on Judge Miller’s legal analysis. Both parties also
agree with Judge Miller that Indiana law governs this case and we do not
question this conclusion. Before us then is the legal question whether the
plaintiff has alleged any injury which Indiana’s law of promissory estoppel
redresses.
Indiana has adopted the Restatement’s theory of promissory estoppel:
A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee and a third person and
which does induce such action or forbearance is binding if injustice can
be avoided only by the enforcement of the promise. The remedy for
breach may be limited as justice requires.
Restatement (Second) of Contracts § 90(1) (1981); Eby v. York–Division,
Borg–Warner, 455 N.E.2d 623, 627 (Ind.App.1983); Pepsi–Cola General
Bottlers, Inc. v. Woods, 440 N.E.2d 696, 698 (Ind.App.1982). The district
judge dismissed the complaint on the ground that Bacardi’s alleged promise
was not one on which it should reasonably have expected General to rely.
The district court first noted that the relationship between General
and Bacardi had always been terminable at will. Because Bacardi’s promises that it would continue to use General as its distributor contained no language indicating that they would be good for any specific period, 1 the court
reasoned that the relationship remained terminable at will. It then concluded that the promise was not legally enforceable, and thus was not one
on which General reasonably might rely. We agree with each of these conclusions but the last. Notwithstanding the continuation of an at-will relationship between Bacardi and General, the promises given between July 9
and July 23 were not without legal effect.
1
Given the context of the promise, we see a plausible argument that the promise was
one for a term, namely that Bacardi would stay on at least until the rush toward consolidation
passed. But the district judge found differently, and we need not question his factual conclusion in light of our legal analysis.
CH. 1
BASES FOR ENFORCING PROMISES
In Indiana, as in many states, an aspiring employee cannot sue for lost
wages on an unfulfilled promise of at-will employment. Pepsi–Cola, 440
N.E.2d 696; accord Ewing v. Board of Trustees of Pulaski Memorial Hosp.,
486 N.E.2d 1094, 1098 (Ind.App.1985) (employment contract for indefinite
tenure is unenforceable for future employment). Because the employer
could have terminated the employee without cause at any time after the
employment began, the promise of a job brings no expectation of any determinable period of employment or corresponding amount of wages. The
promise is therefore unenforceable under either a contract or a promissory
estoppel theory in an action for lost wages. Nevertheless, lost wages are not
the only source of damages flowing from a broken promise of employment,
enforceable or not. Indiana courts acknowledge certain damages as recoverable when the employer breaks a promise of employment, even if the employment is to be terminable at will. For example, in Eby v. York–Division,
Borg–Warner, 455 N.E.2d at 627, a plaintiff who gave up a job and moved
from Indiana to Florida on a promise of employment sued for recovery of
preparation and moving expenses incurred on the basis of the promise. The
court found that the defendant could have expected the plaintiff and his
wife to move in reliance on the promise of employment and therefore might
be liable for reneging. See also Pepsi–Cola, 440 N.E.2d 696).
Our review of Indiana law thus leaves us a simple if somewhat crude
question: are the damages plaintiff seeks here more like lost future wages
or like moving expenses? We can better answer the question if we determine why Indiana draws this distinction. Unlike lost wages, moving expenses represent out-of-pocket losses; they involve a loss of something already possessed. It would be plausible, although not very sophisticated, to
distinguish between the loss of something yet to be received and the loss of
something already in hand. But this is not precisely where Indiana draws
the distinction, nor where we would draw it if it were our choice to make.
Eby itself involved not only moving expenses, but wages lost at plaintiff’s
old job during the few days plaintiff was preparing to move. 455 N.E.2d at
625. Those wages were not out-of-pocket losses: plaintiff had no more received those wages than he had received wages from his promised employment.
In fact, the line Indiana draws is between expectation damages and reliance damages. In future wages, the employee has only an expectation of
income, the recovery of which promissory estoppel will not support in an atwill employment setting. In wages forgone in order to prepare to move, as
in moving expenses themselves, the employee gave up a presently determinate sum for the purpose of relocating. Both moving expenses and forgone
wages were the hopeful employee’s costs of positioning himself for his new
job; moving expenses happen to be out-of-pocket losses, while forgone wages are opportunity costs. Both are reliance costs, not expectancy damages.
Thus, the question has become whether the loss incurred from the
price drop was attributable to lost expectations of future profit or resulted
from an opportunity forgone in reliance on the promise. At first blush, the
injury might seem more like the loss of future wages. Bacardi was a major
supplier whose business was extremely valuable to General. While the loss
of this “asset” might cause a decline in General’s market value as measured
by the loss of future income from the sale of Bacardi’s products, this loss is
not actionable on a promissory estoppel theory. Those damages would presumably be measured by the present value of General’s anticipated profit
from the sale of Bacardi’s products, and Indiana will not grant relief based
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CH. 1
on promissory estoppel to compensate an aggrieved party for such expectancy damages.
But the fact is that recovery of lost profits is not a question before us.
Bacardi’s account was never an “asset” that National could acquire by purchasing General. As counsel for the defendant candidly but carefully explained, National never assumed that it would retain the Bacardi account
by buying General; in fact, National assumed the opposite. Bacardi’s major
competitor in the rum distilling business distributed through National, and
the two top distillers in a given category of liquor would not choose the
same distributor. Both before and after Bacardi decided to withdraw its
products, all National wanted from General were its assets other than the
Bacardi account. But Bacardi’s repudiation of its promise ostensibly affected the price of General’s business so drastically because, as everyone in the
industry understood, General’s option to stay in business independently
was destroyed by Bacardi’s withdrawal of its account. Thus, through its
repudiation, Bacardi destroyed General’s negotiating leverage since General no longer had the alternative of continuing as an independent concern.
Thus, Bacardi’s repudiation turned General’s discussions with National
from negotiations to buy a going concern into a liquidation sale. Instead of
bargaining from strength, knowing it could reject a junk-value offer and
carry on its business, General was left with one choice: sell at any price.
Under these facts, General had a reliance interest in Bacardi’s promise. General was in lively negotiations with National and it repeatedly informed Bacardi of this fact. General had a business opportunity that all
parties knew would be devalued once Bacardi announced its intention to go
elsewhere. The extent of that devaluation represents a reliance injury, rather than an injury to General’s expectation of future profit. The injury is
analogous to the cost of moving expenses incurred as a result of promised
employment in Eby and Pepsi–Cola.
Nor were these promises merely meaningless restatements of an understood at-will relationship. With its current business opportunity, General stood at a crossroads. Circumstances foreshadowed a costly demise for
the company, but it was able to negotiate an alternative. Far from confirming the obvious, Bacardi wrote its assurances on a clean slate with full
knowledge that General was just as likely to reject the offered relationship
as embrace it. That this was the situation is indicated most clearly by
Bacardi’s repeated calls to check on Stout’s impending decision. Bacardi
reassured Stout of its commitment in full knowledge that he planned to
reject National’s offer and with the reasonable expectation that an immediate pull out would severely undermine General’s asking price. Like the
plaintiffs in Eby who moved based on the promise of a job, General incurred
a cost in rejecting the deal that was non-recoverable once Bacardi’s later
decision became known.
There may always exist the potential for a quandary in a promissory
estoppel action based on a promise of at-will employment. When could
Bacardi terminate the relationship with General without fear of liability for
reliance costs, once it made the assurances in question? Obviously we do
not hold that General and Bacardi had formed a new, permanent employment relationship. How long an employee can rely on the employer’s promise is not a matter we can decide here. The issue is one of reasonable reliance, and to the extent that there might be questions, they should be for
trial.
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BASES FOR ENFORCING PROMISES
III.
We have, of course, reviewed this case in the posture of summary
judgment. General’s allegations still must be proven at trial. However, under Indiana law, we think that Bacardi’s promise was of a sort on which
General might rely, with the possibility of damages for breach. For that
reason the judgment of the district court is
Reversed and remanded.
NOTES
(1) Questions. What exactly was the promise on which General relied?
What was the nature of General’s reliance? Was Bacardi’s statement that “it
had no intention of taking its line to another distributor” a promise? Why did
the at-will doctrine not make any reliance by General unreasonable from the
start?
(2) Outcome on Remand. Judge Cudahy recited General’s claim that
“Bacardi emphatically avowed that it had no intention of taking its line to another distributor in Northern Indiana.” On remand, however, the district court
found as a fact that Bacardi’s promise had been “contingent on future events”
since it was “subject to the conditions that General would continue to meet
Bacardi’s expectation in sales and no market changes would occur.” Nevertheless, the district court held that “the conditional nature of Bacardi’s commitment does not make General’s reliance unreasonable.” The court awarded General “damages incurred in reliance on Bacardi’s promise” equal to “the difference between National’s initial offer and the final sale price”—a total of
$394,050. The damages awarded look suspiciously like the “lost opportunities”
denied to the plaintiff in Sullivan v. O’Connor; see Note 2, p. 20 above. Can you
distinguish the two cases with regard to the availability of lost opportunities in
one, but not the other?
PROBLEM
Promising to Undo Harm. As the materials above have suggested, promissory estoppel is commonly invoked to enforce a promise unsupported by consideration: there has been no breach of contract, and yet justice requires a remedy
by virtue of the promisee’s justified reliance on the promise. Might promissory
estoppel function in the context of a failed tort? Consider the reasoning in
Barnes v. Yahoo, 570 F.3d 1096 (9th. Cir.2009), described by the court as
stemming from “a dangerous, cruel, and highly indecent use of the internet for
the apparent purpose of revenge.” Id. at 1098. After the plaintiff, Celia Barnes,
broke off a lengthy relationship with her boyfriend, he began posting nude picture of Barnes (taken without her knowledge) on a Yahoo website. Posing as
Barnes, the boyfriend also directed male correspondents to fraudulent profiles
of Barnes suggesting that she was looking for sex. In consequence, Barnes received email and telephonic solicitations from strangers.
In accordance with Yahoo policies, Barnes mailed Yahoo a copy of her photo ID and a signed statement denying her involvement with the profiles and
requesting their immediate removal. Yahoo made no response and the undesired advances continued. Barnes sent Yahoo several more written requests
over a period of time but received no reply from Yahoo. A day before a local
news program was to run a a report on the matter, Yahoo’s Director of Com-
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CH. 1
munications, Ms. Osako, called Barnes and asked her to fax directly the previous statements she had mailed. Osako told Barnes that she would “personally
walk the statements over to the division responsible for stopping unauthorized
profiles and they would take care of it.” The profiles were not taken down, until
two months later when Barnes filed a lawsuit against Yahoo.
Barnes sued on two grounds: the tort of “negligent undertaking” and her
reliance on Osako’s promise to remove the false profiles. Yahoo argued that
under the Communications Decency Act of 1996, 47 U.S.C.A. § 230(c)(1), it was
immune from liability for the negligent provision of services that Yahoo undertook to provide. The trial court agreed and dismissed Barnes’s tort claim; the
Ninth Circuit affirmed because Yahoo came within a statutorily protected role
as a publisher.
However, with regard to Yahoo’s promise to Barnes, the court saw things
differently:
To undertake a thing, within the meaning of the tort, is to do it. Promising
is different because it is not synonymous with the performance of the action promised. That is, whereas one cannot undertake to do something
without simultaneously doing it, one can, and often does, promise to do
something without actually doing it at the same time. Contract liability
here would come not from Yahoo’s publishing conduct, but from Yahoo’s
manifest intention to be legally obligated to do something, which happens
to be removal of material from publication. Contract law treats the outwardly manifested intention to create an expectation on the part of another as a legally significant event. That event generates a legal duty distinct
from the conduct at hand, be it the conduct of a publisher, of a doctor, or of
an overzealous uncle.
570 F.3d at 1107. The court then held that insofar as Barnes alleged a breach
of contract claim under the theory of promissory estoppel, subsection 230(c)(1)
of the Act did not preclude her cause of action. Putting aside the complexities of
the Communications Indecency Act, how would you analyze Barne’s claim
against Yahoo, applying each of the elements of Section 90?
SECTION 5. RESTITUTION AS AN ALTERNATIVE BASIS
FOR RECOVERY
So far we have been concerned with recovery based on the enforcement
of promises. We turn now to an entirely different basis of recovery: restitution. The term is not entirely new; we encountered the concept of restitution in our introductory exploration of damages at p. 15. There we saw that
a promisee may be entitled to the return of benefits bestowed upon the
promisor, as when the promisee has given the promisor a down payment on
a purchase but the promisor subsequently refuses to sell. Restatement
§ 344(c)
In this section, we examine restitution not simply as a measure of
damage but as a theory of recovery. As stated in the Comment to Section 1
of the Restatement, Third, of Restitution and Unjust Enrichment, “liability
in restitution derives from the receipt of a benefit whose retention without
payment would result in the unjust enrichment of the defendant at the expense of the claimant.” And unjust enrichment may occur even when there
has been no promise. The underlying principle is that “gains produced
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BASES FOR ENFORCING PROMISES
through another’s loss are unjust and should be restored.” John P. Dawson,
The Self–Serving Intermeddler, 87 Harv. L. Rev. 1409 (1974).
Benefits whose retention by the recipient would be unjust arise in a
number of circumstances. Sometimes benefits have been bestowed in error,
as when a person overpays a bill by mistake. The recipient owes restitution
in the amount of the excess payment. Mistakes also arise in the employment context, as when Worker A misunderstands the scope of his duties
and performs services for which Worker B is being paid. Worker A will
have a claim in restitution to recover the money paid to Worker B for the
services actually performed by Worker A. See Restatement (Third) of Restitution and Unjust Enrichment § 9 ill. 9. A number of cases deal with the
problem of improvements to land mistakenly made on the wrong property;
see generally Restatement (Third) of Restitution and Unjust Enrichment
§ 10 ill. 3 (“Mistaking the location of his own land, A builds a house on
property belonging to B. A has a claim in restitution against B.”).
A limiting principle, however, is that one who acts officiously in conferring a benefit (as opposed to acting erroneously) cannot get restitution
from the recipient. One so acting is often called a volunteer, or, using a
term of legal snark, an officious intermeddler. The Restatement (Third)
states the applicable rule: absent circumstances that justify a claimant’s
intervention—and we will look at the possibility of such circumstances in
the cases that follow—there is no liability in restitution “for an unrequested
benefit voluntarily conferred.” § 2(3). Judge Posner approaches the matter
from an economic perspective:
If while you are sitting on your porch drinking Margaritas a trio of
itinerant musicians serenades you with mandolin, lute, and hautboy,
you have no obligation, in the absence of a contract, to pay them for
their performance, no matter how much you enjoyed it. . . . When voluntary transactions are feasible (in economic parlance, when the
transactions costs are low), it is better and cheaper to require the parties to make their own terms than for a court to try to fix them—better
and cheaper that the musicians should negotiate a price with you in
advance than for them to go running to a court for a judicial determination of the just price of their performance.
Indiana Lumbermens Mut. Ins. Co. v. Reinsurance Results, Inc., 513 F3d
652 (7th Cir.2008).
Yet, there may be circumstances that justify compensating a person for
benefits received that were not negotiated beforehand. The following case,
involving medical services provided to an unconscious accident victim, begins to sort out differences between deserving claimants and officious intermeddlers, and highlights the difficulties of determining a just price in
cases of unjust enrichment.
A final word regarding the vocabulary of restitution. Sometimes the
term quasi-contract is used to describe a ground for recovering money in an
action at common law, when the claim is not based on a true contract but
instead seeks redress for unjust enrichment. Quantum meruit (as much as
is deserved) describes a type of action used for centuries in enforcing duties
of payment for services. A related action for the worth of goods was quantum valebant (as much as they were worth). The term quantum meruit is
often used interchangeably (if inexactly) with quasi-contract. Restitution is
a broader term used to embrace all of the grounds for recovery based on
unjust enrichment.
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Cotnam v. Wisdom
Supreme Court of Arkansas, 1907.
83 Ark. 601, 104 S.W. 164.
Action by F.L. Wisdom and another against T.T. Cotnam, administrator of A.M. Harrison, deceased, for services rendered by plaintiffs as surgeons to defendant’s intestate. Judgment for plaintiffs. Defendant appeals.
Reversed and remanded.
Instructions 1 and 2, given at the instance of plaintiffs, are as follows:
“(1) If you find from the evidence that plaintiffs rendered professional services as physicians and surgeons to the deceased, A.M. Harrison, in a sudden emergency following the deceased’s injury in a street car wreck, in an
endeavor to save his life, then you are instructed that plaintiffs are entitled
to recover from the estate of the said A.M. Harrison such sum as you may
find from the evidence is a reasonable compensation for the services rendered. (2) The character and importance of the operation, the responsibility
resting upon the surgeon performing the operation, his experience and professional training, and the ability to pay of the person operated upon, are
elements to be considered by you in determining what is a reasonable
charge for the services performed by plaintiffs in the particular case.”
■ HILL, C.J. . . . The first question is as to the correctness of [the first] instruction. . . . [T]he facts are that Mr. Harrison . . . was thrown from a
street car, receiving serious injuries which rendered him unconscious, and
while in that condition the appellees were notified of the accident and
summoned to his assistance by some spectator, and performed a difficult
operation in an effort to save his life, but they were unsuccessful, and he
died without regaining consciousness. The appellant says: “Harrison was
never conscious after his head struck the pavement. He did not and could
not, expressly or impliedly, assent to the action of the appellees. He was
without knowledge or will power. However merciful or benevolent may
have been the intention of the appellees, a new rule of law, of contract by
implication of law, will have to be established by this court in order to sustain the recovery.” Appellant is right in saying that the recovery must be
sustained by a contract by implication of law, but is not right in saying that
it is a new rule of law, for such contracts are almost as old as the English
system of jurisprudence. They are usually called “implied contracts.” More
properly they should be called “quasi contracts” or “constructive contracts.”
See 1 Page on Contracts, sec. 14; also 2 Page on Contracts, sec. 771.
The following excerpts from Sceva v. True, 53 N.H. 627, are peculiarly
applicable here: “We regard it as well settled by the cases referred to in the
briefs of counsel, many of which have been commented on at length by Mr.
Shirley for the defendant, that an insane person, an idiot, or a person utterly bereft of all sense and reason by the sudden stroke of an accident or disease may be held liable, in assumpsit, for necessaries furnished to him in
good faith while in that unfortunate and helpless condition. And the reasons upon which this rests are too broad, as well as too sensible and humane, to be overborne by any deductions which a refined logic may make
from the circumstances that in such cases there can be no contract or promise, in fact, no meeting of the minds of the parties. The cases put it on the
ground of an implied contract; and by this is not meant, as the defendant’s
counsel seems to suppose, an actual contract—that is, an actual meeting of
the minds of the parties, an actual, mutual understanding, to be inferred
from language, acts, and circumstances by the jury—but a contract and
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BASES FOR ENFORCING PROMISES
promise, said to be implied by the law, where, in point of fact, there was no
contract, no mutual understanding, and so no promise. The defendant’s
counsel says it is usurpation for the court to hold, as a matter of law, that
there is a contract and a promise, when all the evidence in the case shows
that there was not a contract, nor the semblance of one. It is doubtless a
legal fiction, invented and used for the sake of the remedy. If it was originally usurpation, certainly it has now become very inveterate, and firmly
fixed in the body of the law. Illustrations might be multiplied, but enough
has been said to show that when a contract or promise implied by law is
spoken of, a very different thing is meant from a contract in fact, whether
express or tacit. The evidence of an actual contract is generally to be found
either in some writing made by the parties, or in verbal communications
which passed between them, or in their acts and conduct considered in the
light of the circumstances of each particular case. A contract implied by
law, on the contrary, rests upon no evidence. It has no actual existence. It
is simply a mythical creation of the law. The law says it shall be taken that
there was a promise, when in point of fact, there was none. Of course this is
not good logic, for the obvious and sufficient reason that it is not true. It is
a legal fiction, resting wholly for its support on a plain legal obligation, and
a plain legal right. If it were true, it would not be a fiction. There is a class
of legal rights, with their correlative legal duties, analogous to the obligations quasi ex contractu of the civil law which seem to lie in the region between contracts on the one hand, and torts on the other, and to call for the
application of a remedy not strictly furnished either by actions ex contractu
or actions ex delicto. . . . ”
In its practical application it sustains recovery for physicians and
nurses who render services for infants, insane persons, and drunkards. . . .
And services rendered by physicians to persons unconscious or helpless by
reason of injury or sickness are in the same situation as those rendered to
persons incapable of contracting, such as the classes above described. . . .
The court was therefore right in giving the instruction in question. . . .
There was evidence in this case proving that it was customary for physicians to graduate their charges by the ability of the patient to pay, and
hence, in regard to that element, this case differs from the Alabama case
[Morrisette v. Wood, 123 Ala. 384, 26 So. 307]. . . . This could not apply to a
physician called in an emergency by some bystander to attend a stricken
man whom he never saw or heard of before; and certainly the unconscious
patient could not, in fact or in law, be held to have contemplated what
charges the physician might properly bring against him. In order to admit
such testimony, it must be assumed that the surgeon and patient each had
in contemplation that the means of the patient would be one factor in determining the amount of the charge for the services rendered. While the
law may admit such evidence as throwing light upon the contract and indicating what was really in contemplation when it was made, yet a different
question is presented when there is no contract to be ascertained or construed, but a mere fiction of law creating a contract where none existed in
order that there might be a remedy for a right. This fiction merely requires
a reasonable compensation for the services rendered. The services are the
same be the patient prince or pauper, and for them the surgeon is entitled
to fair compensation for his time, service, and skill. It was therefore error
to admit this evidence, and to instruct the jury in the second instruction
that in determining what was a reasonable charge they could consider the
“ability to pay of the person operated upon.”
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It was improper to let it go to the jury that Mr. Harrison was a bachelor and that his estate was left to nieces and nephews. This was relevant to
no issue in the case, and its effect might well have been prejudicial. While
this verdict is no higher than some of the evidence would justify, yet it is
much higher than some of the other evidence would justify, and hence it is
impossible to say that this was a harmless error.
Judgment is reversed, and cause remanded.
■ BATTLE and WOOD, JJ., concur in sustaining the recovery, and in holding
that it was error to permit the jury to consider the fact that his estate
would go to collateral heirs; but they do not concur in holding that it was
error to admit evidence of the value of the estate, and instructing that it
might be considered in fixing the charge.
NOTES
(1) Questions. Would the result have been different if Dr. Wisdom had
treated Harrison in response to a call from Harrison’s daughter, who had said,
“Give him the best care you can and I will pay you for it”? What fee would Dr.
Wisdom have been entitled to from the daughter under those circumstances?
For a case rejecting Cotnam v. Wisdom on the issue of the admissibility of the
patient’s ability to pay, see In re Agnew’s Estate, 231 N.Y.S. 4 (Surrogate’s
Ct.1928). Are there grounds, policy or otherwise, for admitting such evidence?
The Restatement (Third) of Restitution and Unjust Enrichment agrees with the
rule in the principal case that “[u]njust enrichment . . . [in such circumstances]
is measured by a reasonable charge.” § 20.
Would the result have been different if you had seen Harrison lying injured in the street, stopped to treat him, and had done so successfully? Recovery? What underlies Comment b of the Restatement (Third) of Restitution and
Unjust Enrichment § 20 cmt. b (Protection Of Another’s Life Or Health), which
observes that even though a rescue by a bystander “may confer a benefit of inestimable value,” the heroic bystander receives nothing? Is the problem one of
calculating the services provided by an amateur? A dissatisfaction with uncompensated labor? Or, as suggested by Comment b to § 20, is there something
morally troubling about paying for all services? Comment b specifically notes:
The imposition of restitutionary liability in such circumstances. . .
transforms an act of self-sacrifice into a contentious exchange of values.
The law avoids these unedifying consequences by presuming that an
emergency rescue is a gratuitous act. The heroic bystander receives nothing; the heroic professional receives a “reasonable and customary charge”
for professional services, but nothing extra for heroism.
Restatement of Restitution and Unjust Enrichment § 20 cmt. b (2001). Recall
the court’s argument in Webb that saving life has “material, pecuniary” value,
supported by the fact that “physicians practice their profession charging for
services rendered in saving life.” Would Webb have had a claim against
McGowin in restitution?
(2) The Protection of Property. The Webb court relied upon Boothe v. Fitzpatrick, the case of the promise “to pay for the past keeping of a bull which had
escaped . . . and been cared for.” See p. 55. Aside from the promise by the owner of the bull, would the keeper of the bull have had a claim against its owner?
Should emergency interventions by bystanders to protect property be treated
differently than interventions to protect a person’s life or health? Might the
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BASES FOR ENFORCING PROMISES
answer depend on the nature of the property—livestock, chattels, or real property? What is the appropriate measure of recovery in such a case? See Restatement (Third) of Restitution and Unjust Reliance § 21 (Protection Of Another’s Property). Note under the Restatement (Third) restitution for services
provided to protect health or property is available only when “circumstances
justify the decision to intervene without request.” § 21(1). Why the limiting
proviso?
(3) Comparative Recompense. Consider the doctrine known to civil law systems (those derived from Roman law) as negotiorum gestio (“management of the
affairs [of another]”). It provides that a person who, without invitation but in
compelling circumstances, takes charge of the affairs of another, is entitled to
compensation for services rendered in the other’s interest. How does this doctrine differ from that in Cotnam v. Wisdom? What problems do you see in the
application of such a doctrine? See Samuel J. Stoljar, Negotiorum Gestio § 251
(1984), in 10 International Encyclopedia of Comparative Law (1973).
PROBLEM
The Suggestion Box. Schott, an employee of Westinghouse, twice submitted an idea concerning the construction of circuit breaker panels pursuant to a
Westinghouse program inviting its employees to submit suggestions for cash
awards. On the suggestion form, above the line for the employee’s signature,
appeared the stipulation, “I agree that the decision of the local Suggestion
Committee on all matters pertaining to this suggestion . . . will be final.” The
Committee twice rejected Schott’s suggestion, stating that it would require
heavy preliminary expenditures but would be reconsidered if circuit breaker
redesign was undertaken for other reasons. Within a year, however, Westinghouse had made the suggested change but refused to pay Schott, explaining
that it had been made as “the result of independent action taken without
knowledge of your suggestion.” What factors weigh in Schott’s favor in an action against Westinghouse for unjust enrichment? What facts favor Westinghouse? Might Schott have a claim for breach of contract? In Schott v. Westinghouse Electric Corp., 259 A.2d 443 (Pa.1969), two judges answered the last
question with a “Yes.”
Callano v. Oakwood Park Homes Corp.
Superior Court of New Jersey, 1966.
91 N.J.Super. 105, 219 A.2d 332.
■ COLLESTER, J.A.D. Defendant Oakwood Park Homes Corp., (Oakwood)
appeals from a judgment of $475 entered in favor of plaintiffs Julia Callano
and Frank Callano in the Monmouth County District Court.
The case was tried below on an agreed stipulation of facts. Oakwood,
engaged in the construction of a housing development, in December 1961
contracted to sell a lot with a house to be erected thereon to Bruce
Pendergast, who resided in Waltham, Massachusetts. In May 1962, prior to
completion of the house, the Callanos, who operated a plant nursery, delivered and planted shrubbery pursuant to a contract with Pendergast. A representative of Oakwood had knowledge of the planting.
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Pendergast never paid the Callanos the invoice price of $497.95. A
short time after the shrubbery was planted Pendergast died. Thereafter, on
July 10, 1962 Oakwood and Pendergast’s estate cancelled the contract of
sale. Oakwood had no knowledge of Pendergast’s failure to pay the
Callanos. On July 16, 1962 Oakwood sold the Pendergast property, including the shrubbery located thereon, to Richard and Joan Grantges for an
undisclosed amount.
The single issue is whether Oakwood is obligated to pay plaintiffs for
the reasonable value of the shrubbery on the theory of quasi-contractual
liability. Plaintiffs contend that defendant was unjustly enriched when the
Pendergast contract to purchase the property was cancelled and that an
agreement to pay for the shrubbery is implied in law. Defendant argues
that the facts of the case do not support a recovery by plaintiffs on the theory of quasi-contract.
Contracts implied by law, more properly described as quasi or constructive contracts, are a class of obligations which are imposed or created
by law without regard to the assent of the party bound, on the ground that
they are dictated by reason and justice. They rest solely on a legal fiction
and are not contract obligations at all in the true sense, for there is no
agreement; but they are clothed with the semblance of contract for the purpose of the remedy, and the obligation arises not from consent, as in the
case of true contracts, but from the law or natural equity. Courts employ
the fiction of quasi or constructive contract with caution. 17 C.J.S. Contracts § 6, pp. 566–570 (1963).
In cases based on quasi-contract liability, the intention of the parties is
entirely disregarded, while in cases of express contracts and contracts implied in fact the intention is of the essence of the transaction. In the case of
actual contracts the agreement defines the duty, while in the case of quasicontracts the duty defines the contract. Where a case shows that it is the
duty of the defendant to pay, the law imparts to him a promise to fulfill
that obligation. The duty which thus forms the foundation of a quasicontractual obligation is frequently based on the doctrine of unjust enrichment. It rests on the equitable principle that a person shall not be allowed
to enrich himself unjustly at the expense of another, and on the principle of
whatsoever it is certain a man ought to do, that the law supposes him to
have promised to do. St. Paul Fire, etc., Co. v. Indemnity Ins. Co. of No.
America, 32 N.J. 17, 22, 158 A.2d 825 (1960).
The key words are enrich and unjustly. To recover on the theory of
quasi-contract the plaintiffs must prove that defendant was enriched, viz.,
received a benefit, and that retention of the benefit without payment therefor would be unjust.
It is conceded by the parties that the value of the property, following
the termination of the Pendergast contract, was enhanced by the reasonable value of the shrubbery at the stipulated sum of $475. However, we are
not persuaded that the retention of such benefit by defendant before it sold
the property to the Grantges was inequitable or unjust.
Quasi-contractual liability has found application in a myriad of situations. See Woodruff, Cases on Quasi–Contracts (3d ed. 1933). However, a
common thread runs throughout its application where liability has been
successfully asserted, namely, that the plaintiff expected remuneration
from the defendant, or if the true facts were known to plaintiff, he would
have expected remuneration from defendant, at the time the benefit was
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BASES FOR ENFORCING PROMISES
conferred. See Rabinowitz v. Mass. Bonding & Insurance Co., 119 N.J.L.
552, 197 A. 44 (E. & A. 1937); Power–Matics, Inc. v. Ligotti, 79 N.J.Super.
294, 191 A.2d 483 (App.Div.1963); Shapiro v. Solomon, 42 N.J.Super. 377,
126 A.2d 654 (App.Div.1956). It is further noted that quasi-contract cases
involve either some direct relationship between the parties or a mistake on
the part of the person conferring the benefit.
In the instant case the plaintiffs entered into an express contract with
Pendergast and looked to him for payment. They had no dealings with defendant, and did not expect remuneration from it when they provided the
shrubbery. No issue of mistake on the part of plaintiffs is involved. Under
the existing circumstances we believe it would be inequitable to hold defendant liable. Plaintiffs’ remedy is against Pendergast’s estate, since they
contracted with and expected payment to be made by Pendergast when the
benefit was conferred. . . . A plaintiff is not entitled to employ the legal
fiction of quasi-contract to “substitute one promisor or debtor for another.”
Cascaden v. Magryta, 247 Mich. 267, 225 N.W. 511, 512 (Sup.Ct.1929).
Plaintiffs place reliance on De Gasperi v. Valicenti, 198 Pa.Super. 455,
181 A.2d 862 (Super.Ct.1962), where recovery was allowed on the theory of
unjust enrichment. We find the case inapposite. It is clear that recovery on
quasi-contract was permitted there because of a fraud perpetrated by defendants. There is no contention of fraud on the part of Oakwood in the instant case.
Recovery on the theory of quasi-contract was developed under the law
to provide a remedy where none existed. Here, a remedy exists. Plaintiffs
may bring their action against Pendergast’s estate. We hold that under the
facts of this case defendant was not unjustly enriched and is not liable for
the value of the shrubbery.
Reversed.
NOTES
(1) Questions. Which, if any, of the players in the case—Oakwood, the
Grantges, the Pendergast estate—was enriched by the transaction? Why did
the Callanos not sue Pendergast’s estate? Why not the Grantges? How might
the Callanos have better protected themselves in this transaction?
(2) The Case of the Contractor’s Claim. In Johnson v. Larson, 779 N.W.2d
412 (S.D. 2010), Johnson arranged that Larson would remove rock from his
land in exchange for the value of the rock, with a later agreement that Larson
could store the rock on Johnson’s land in exchange for installing drain tile.
Some time later, Penny asked whether he could have the rock; believing that
Larson had abandoned the rock, Johnson said yes, and Penny removed the rock
gratis. Naturally, Larson then showed up, demanding the rock. Left rockless,
Larson then sued Johnson and Penny. Were Penny and Johnson unjustly enriched?
The court held that Larson had no cause of action in unjust enrichment
against Johnson; “there was no room for a court to imply a promise by Larson
to pay Johnson, as the parties expressly fixed their rights and obligations:
Johnson’s remedy lay in a claim for breach of contract.” 779 N.W.2d at 416. In
contrast, the court held that there was no contract between Larson and Penny,
so an unjust enrichment action was available—indeed, “[t]he transfer between
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Johnson and Penny is the very type of event contemplated by the doctrine of
unjust enrichment.” 779 N.W.2d at 417.
Can this case be distinguished from Callano? One writer suggests:
Where benefit is conferred on a stranger through performance of
one’s own contract various intermediate solutions could be thought of.
The most plausible would be to permit restitution of the benefit to the
stranger when the remedy of the gain-producer against his own obligor
had failed or was certain to fail. Restitution would then serve as a surrogate, being held in reserve to insure the gain-producer against deficits in
the return promised him.
John P. Dawson, The Self–Serving Intermeddler, 87 Harv. L. Rev. 1409, 1457–
58 (1974). To what extent are Callano and Johnson consistent with this suggestion? For an analysis in economic terms, see Anthony T. Kronman and Richard
A. Posner, The Economics of Contract Law 59–64 (1979).
(3) Measure of Recovery. If recovery is allowed in cases like Callano how
should it be measured? The Restatement offers two alternatives: “the reasonable value to the [defendant] of what he received in terms of what it would have
cost him to obtain it from a person in the claimant’s position” and “the extent to
which the [defendant’s] property has increased in value or his other interests
advanced.” See Restatement § 371. Which measure would be more generous?
Do we know that on selling the lot to the Grantges, Oakwood got a price enhanced by the value of the shrubbery? Should it matter?
(4) Mechanics’ Liens. Callano introduces a problem of great practical importance: the rights of subcontractors on construction jobs. Commonly in such
cases, two contracts are involved, one between an owner and a general contractor, and another between the general contractor and a subcontractor. It is clear
that if, after the subcontractor has performed, it is not paid by the general contractor, it has no contractual right to payment from the owner. It is also clear,
under reasoning like that in Callano, that it has no right to restitution from the
owner, even though its work has conferred a benefit on the owner.
Every state legislature has addressed the situation in statutes commonly
called “mechanics’ lien” laws. They protect laborers, suppliers, contractors and
others who make improvements on real property, by giving them a lien on that
property to secure payment for those improvements.
Why did the Callanos and Larson not have mechanics’ liens on the properties concerned? Although a New Jersey statute provides for a lien on property
for improvements, including “planting thereon any shrubs,” it applies only to
“debts contracted by the owner.” N.J. Stat. Ann. § 2A:44A–4. Oakwood, not
Pendergast, was the “owner” of the property. Similarly, a Tennessee statute
provides for a lien where improvements have been made on a house, but only
by “contract with the owner or the owner’s agent.” Tenn.Code Ann. § 66–11–
102(a).
(5) Wrestling With Unjust Enrichment. The court in Callano observed that
Oakwood might have been accountable if it had perpetrated a fraud. Compare
Ventura v. Titan Sports, Inc., 65 F.3d 725 (8th Cir.1995). Jesse Ventura, in
1987 a wrestler and “heel commentator,” hired Barry Bloom to negotiate his
contract with Titan Sports, owners of the World Wrestling Federation. (According to the court, “[a] heel commentator is a color commentator who plays the
role of ‘the bad guy.’ ”) Bloom asked for royalties for any videotape sales in
CH. 1
BASES FOR ENFORCING PROMISES
which Ventura appeared but was told that only “feature” performers got royalties. Wanting to secure the job with Titan, Ventura agreed to waive any claim
to royalties. When Ventura found out that other non-feature performers were
getting royalties, he brought an action for fraud, misappropriation of publicity
rights, and unjust enrichment. The jury awarded Ventura $800,000 on the latter claim. On appeal, Titan argued that the express contractual provision waiving royalties barred Ventura’s claim for unjust enrichment. Held: Affirmed. The
court said: “Had Ventura known that Titan did not abide by its stated policy, he
would not have accepted a deal which did not compensate him for [the sale of
his likeness]. . . . The fraud rescinded or set aside the contract, opening the door
to his quantum meruit claim.”
———
Pyeatte v. Pyeatte
661 P.2d 196 (Ariz.App.1982).
[Charles Pyeatte and Margrethe Pyeatte were married in 1974. The
couple agreed that Margrethe would “put Charles through law school without his having to work” and that when he had graduated, he would put her
through graduate school on the same terms. Thus Charles attended law
school and Margrethe worked to pay the bills. (Sometime during Charles’s
third year, Margrethe lost her job and the couple lived on their savings for
that period.) Charles was graduated in 1977, passed the bar, and became
an associate at a law firm. In April, 1978, Charles informed Margrethe that
he wanted a divorce. She had not yet started graduate school. She sued for
breach of their agreement to put one another through school.
The trial court found that the couple’s agreement was a valid contract
and awarded Margrethe $23,000. On appeal, Charles argued that the
agreement was too indefinite to be enforceable. Margrethe countered that
she was entitled to recover in restitution. The Arizona Court of Appeals
granted her claim for restitution and Charles appealed.]
■ CORCORAN, JUDGE: . . . Although we found that the spousal agreement
failed to meet the requirements [of definiteness] of an enforceable contract,
the agreement still has importance in considering appellee’s claim for unjust enrichment because it both evidences appellee’s expectation of compensation and the circumstances which make it unjust to allow appellant to
retain the benefits of her extraordinary efforts.
[The court then addressed the question “whether restitution on the basis of unjust enrichment is appropriate in the context of the marital relationship.”] No authority is cited to the court in support of the proposition
that restitution as a matter of law is inappropriate in a dissolution proceeding. In Wisner [v. Wisner, 631 P.2d 115, 123 (Ariz.App.1981)], we observed
that “[i]n our opinion, unjust enrichment, as a legal concept, is not properly
applied in the setting of a marital relationship.” . . . Our observation was
directed to the wife’s claim in that case for restitution for the value of her
homemaking services during the couple’s 15–year marriage and for the
couple’s reduced income during the husband’s lengthy training period.
Where both spouses perform the usual and incidental activities of the marital relationship, upon dissolution there can be no restitution for performance of these activities. Ibid. Where, however, the facts demonstrate an
agreement between the spouses and an extraordinary or unilateral effort
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BASES FOR ENFORCING PROMISES
CH. 1
by one spouse which inures solely to the benefit of the other by the time of
dissolution, the remedy of restitution is appropriate. . . .
The portion of the judgment in the amount of $23,000 is reversed and
remanded for proceedings in accordance with this opinion.
NOTES
(1) Questions. What did the lower court’s award of $23,000 represent? How
should the lower court calculate Margrethe’s recovery for unjust enrichment?
Suppose that the Pyeattes had not divorced until ten years after Charles’ graduation from law school, during which time Margrethe had lived as the wife of a
successful law firm partner. How might such facts affect her restitutionary
claim?
(2) Restitution Between Spouses. Restitutionary claims between spouses
have traditionally failed because the services of each are presumed to be gratuitous. As the Supreme Court of North Carolina explained, the rule denying restitution “is particularly applicable where a husband makes improvements to
his wife’s land because of the presumption that the improvements constitute a
gift.” Wright v. Wright, 289 S.E.2d 347 (N.C.1982). Historically, the presumption of a gift extended to other family relationships as well. The Pennsylvania
Supreme Court refused to grant restitution to an adult son despite evidence of
his father’s promise to pay for the son’s labor, observing that “we do not infer a
contract of hiring, because the principle of family affection is sufficient to account for the family association. . . . ” Hertzog v. Hertzog, 29 Pa. 465, 468
(Pa.1857).
(3) Restitution Between Cohabitants. When a sexual relationship between
unmarried cohabitants was included among the benefits bestowed, courts traditionally refused to grant restitution on public policy grounds. See Hewitt v.
Hewitt, 394 N.E.2d 1204 (Ill.1979). Restitution has been permitted when sexual services were found to be severable from other forms of enrichment, such as
improvements to property. In Watts v. Watts, 405 N.W.2d 303 (Wis.1987), the
Supreme Court of Wisconsin held that “unmarried cohabitants may raise
claims based upon unjust enrichment following the termination of their relationship where one of the parties attempts to retain an unreasonable amount of
the property acquired through the efforts of both.”
In 2011, section 28(1) of the Restatement (Third) of Restitution and Unjust
Enrichment recognized that “substantial, uncompensated contributions in the
form of property or services” made by one person “living together in a relationship resembling marriage” to the asset of the other person “has a claim in restitution against the owner as necessary to prevent unjust enrichment upon the
dissolution of the relationship.”
PROBLEM
Sorting It Out. Frederick Ormsby and Amber Williams were romantic
partners. In 2004, Frederick moved into Amber’s house and began making the
mortgage payments. By the end of the year, he had paid off the entire balance
of $310,000. At that point, in return for Frederick’s payments, Amber gave him
the title to the property. The couple had planned to marry but were deterred by
Frederick’s existing marriage to someone else. Nonetheless, Frederick and Amber lived together until March 2005, when Amber moved out of the house. The
CH. 1
BASES FOR ENFORCING PROMISES
couple then agreed in writing to sell the house and allocate the proceeds between them. Two months later, the couple attempted a reconciliation. However,
Amber refused to move back into the house with Frederick unless he gave her
an undivided one-half interest in the property. In June, 2005, they signed a
second document, making themselves “equal partners” in the house. Amber
moved back in, but by April 2007, they were living in separate areas of the
house. Finally, in September, 2007, the couple broke up. Frederick moved out
in April, 2008.
A month later they filed suit against each other. Amber sought specific
performance of the 2005 document giving give her a half-interest in the property. Frederick sought a declaratory judgment that both the March 2005 and
June 2005 documents were not supported by consideration, and that the house
was his; he also sought unjust enrichment, should either of the documents be
declared valid as a contract. The trial court held that the March 2005 agreement was supported by consideration but that the June 2005 agreement was
not. The district court of appeals reversed; Williams v. Ormsby, 944 N.E.2d 699
(Ohio. App. 2010). Frederick appealed, and the Ohio Supreme Court accepted
jurisdiction to decide the following proposition: “Moving into a home with another and resuming a romantic relationship cannot serve as legal consideration
for a contract; love and affection [are] insufficient consideration for a contract.”
How would you argue this case? How would you decide it? See Williams v.
Ormsby, 966 N.E.2d 255 (Ohio 2012).
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OBLIGATIONS
SECTION 1.
THE NATURE OF ASSENT
What kind of assent to a bargain is necessary to bind a party? Different answers are given by two contrasting theories of contract, commonly
described as “objective” and “subjective.” They are illustrated by the following excerpts from two distinguished jurists, Judge Learned Hand a and
his colleague on the bench Judge Jerome Frank, b concurring in a case in
which Hand wrote the opinion of the court.
According to Hand:
A contract has, strictly speaking, nothing to do with the
personal, or individual, intent of the parties. A contract is an
obligation attached by the mere force of law to certain acts of the
parties, usually words, which ordinarily accompany and
represent a known intent. If, however, it were proved by twenty
bishops that either party when he used the words intended
something else than the usual meaning which the law imposes
upon them, he would still be held, unless there were some
mutual mistake or something else of the sort.
Hotchkiss v. National City Bank of New York, 200 F. 287, 293
(S.D.N.Y.1911).
According to Frank:
In the early days of this century a struggle went on between
the respective proponents of two theories of contracts, (a) the ‘actual intent’ theory—or ‘meeting of the minds’ or ‘will’ theory—and
(b) the so-called ‘objective’ theory.1 Without doubt, the first theory
a
Learned Hand (1872–1961) was admitted to the practice of law in New York in 1897,
appointed to the United States District Court for the Southern District of New York in 1909
and to the United States Court of Appeals for the Second Circuit in 1924. He retired in 1951,
after having sat on the bench longer than any other federal judge. Justice Cardozo called him
“the greatest living American jurist,” and he was so regarded by many of his contemporaries.
His extrajudicial utterances may be sampled in The Spirit of Liberty (1952) and The Bill of
Rights (1958).
b
Jerome New Frank (1889–1957) practiced in Chicago and New York for more than
twenty years before going to Washington in 1933, where he served first as a government
lawyer and then as a member and later chairman of the Securities and Exchange Commission. In 1941 he was appointed to the United States Court of Appeals for the Second Circuit.
He also lectured at the Yale Law School and was associated with the philosophy of law
known as “legal realism.” One of his best known books is Law and the Modern Mind (1930).
1
“The ‘actual intent’ theory, said the objectivists, being ‘subjective’ and putting too
much stress on unique individual motivations, would destroy that legal certainty and stability which a modern commercial society demands. They depicted the ‘objective’ standard as a
necessary adjunct of a ‘free enterprise’ economic system. In passing, it should be noted that
they arrived at a sort of paradox. For a ‘free enterprise’ system is, theoretically, founded on
‘individualism’; but, in the name of economic individualism, the objectivists refused to consider those reactions of actual specific individuals which sponsors of the ‘meeting-of-theminds’ test purported to cherish. ‘Economic individualism’ thus shows up as hostile to real
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had been carried too far: Once a contract has been validly made,
the courts attach legal consequences to the relation created by the
contract, consequences of which the parties usually never
dreamed—as, for instance, where situations arise which the parties had not contemplated. As to such matters, the ‘actual intent’
theory induced much fictional discourse which imputed to the parties intentions they plainly did not have.
But the objectivists also went too far. They tried (1) to treat
virtually all the varieties of contractual arrangements in the same
way, and (2), as to all contracts in all their phases, to exclude, as
legally irrelevant, consideration of the actual intention of the
parties or either of them, as distinguished from the outward
manifestation of that intention. The objectivists transferred from
the field of torts that stubborn anti-subjectivist, the ‘reasonable
man’; so that, in part at least, advocacy of the ‘objective’ standard
in contracts appears to have represented a desire for legal
symmetry, legal uniformity, a desire seemingly prompted by
aesthetic impulses. Whether (thanks to the ‘subjectivity’ of the
jurymen’s reactions and other factors) the objectivists’ formula, in
its practical workings, could yield much actual objectivity,
certainty, and uniformity may well be doubted. At any rate, the
sponsors of complete ‘objectivity’ in contracts largely won out in
the wider generalizations of the Restatement of Contracts and in
some judicial pronouncements.
Ricketts v. Pennsylvania R. Co., 153 F.2d 757, 761 (2d Cir.1946).
Bear these theories in mind as you read the next two cases concerning
assent. Lucy v. Zehmer, directly below, involves a transaction for the sale
of a farm after some back and forth over drinks and a promise written out
on the back of a restaurant receipt. Specht v. Netscape, on p. 131, moves
us from what the court called “the world of paper” to online transactions.
When reading these cases, question whether the court has gone too far or
not far enough in excluding the parties’ actual intent.
Lucy v. Zehmer
Supreme Court of Appeals of Virginia, 1954.
196 Va. 493, 84 S.E.2d 516.
■ BUCHANAN, JUSTICE. This suit was instituted by W.O. Lucy and J.C. Lucy, complainants, against A.H. Zehmer and Ida S. Zehmer, his wife, defendants, to have specific performance of a contract by which it was alleged the Zehmers had sold to W.O. Lucy a tract of land owned by A.H.
Zehmer in Dinwiddie county containing 471.6 acres, more or less, known
as the Ferguson farm, for $50,000. J.C. Lucy, the other complainant, is a
brother of W.O. Lucy, to whom W.O. Lucy transferred a half interest in his
alleged purchase.
The instrument sought to be enforced was written by A.H. Zehmer on
[Saturday,] December 20, 1952, in these words: “We hereby agree to sell to
W.O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to
buyer,” and signed by the defendants, A.H. Zehmer and Ida S. Zehmer. c
individualism. This is nothing new: The ‘economic man’ is of course an abstraction, a ‘fiction.’ ”
c
Here is a photocopy from the record:
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CREATING CONTRACTUAL OBLIGATIONS
The answer of A.H. Zehmer admitted that at the time mentioned
W.O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer,
considered that the offer was made in jest; that so thinking, and both he
and Lucy having had several drinks, he wrote out “the memorandum”
quoted above and induced his wife to sign it; that he did not deliver the
memorandum to Lucy, but that Lucy picked it up, read it, put it in his
pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer
refused to accept, and realizing for the first time that Lucy was serious,
Zehmer assured him that he had no intention of selling the farm and that
the whole matter was a joke. Lucy left the premises insisting that he had
purchased the farm.
Depositions were taken and the decree appealed from was entered
holding that the complainants had failed to establish their right to specific
performance, and dismissing their bill. The assignment of error is to this
action of the court. . . .
The defendants insist that the evidence was ample to support their
contention that the writing sought to be enforced was prepared as a bluff
or dare to force Lucy to admit that he did not have $50,000; that the whole
matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.
It is an unusual, if not bizarre, defense. When made to the writing
admittedly prepared by one of the defendants and signed by both, clear
evidence is required to sustain it.
In his testimony Zehmer claimed that he “was high as a Georgia
pine,” and that the transaction “was just a bunch of two doggoned drunks
bluffing to see who could talk the biggest and say the most.” That claim is
inconsistent with his attempt to testify in great detail as to what was said
and what was done. It is contradicted by other evidence as to the condition
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of both parties, and rendered of no weight by the testimony of his wife that
when Lucy left the restaurant she suggested that Zehmer drive him home.
The record is convincing that Zehmer was not intoxicated to the extent of
being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on
that ground. C.J.S. Contracts, § 133, b., p. 483; Taliaferro v. Emery, 124
Va. 674, 98 S.E. 627. It was in fact conceded by defendants’ counsel in oral
argument that under the evidence Zehmer was not too drunk to make a
valid contract.
The evidence is convincing also that Zehmer wrote two agreements,
the first one beginning “I hereby agree to sell.” Zehmer first said he could
not remember about that, then that “I don’t think I wrote but one out.”
Mrs. Zehmer said that what he wrote was “I hereby agree,” but that the “I”
was changed to “We” after that night. The agreement that was written and
signed is in the record and indicates no such change. Neither are the mistakes in spelling that Zehmer sought to point out readily apparent.
The appearance of the contract, the fact that it was under discussion
for forty minutes or more before it was signed; Lucy’s objection to the first
draft because it was written in the singular, and he wanted Mrs. Zehmer
to sign it also; the rewriting to meet that objection and the signing by Mrs.
Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the completeness of the instrument
that was executed, the taking possession of it by Lucy with no request or
suggestion by either of the defendants that he give it back, are facts which
furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend. . . .
If it be assumed, contrary to what we think the evidence shows, that
Zehmer was jesting about selling his farm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows
that Lucy did not so understand it but considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as
on himself. The very next day he arranged with his brother to put up half
the money and take a half interest in the land. The day after that he employed an attorney to examine the title. The next night, Tuesday, he was
back at Zehmer’s place and there Zehmer told him for the first time, Lucy
said, that he wasn’t going to sell and he told Zehmer, “You know you sold
that place fair and square.” After receiving the report from his attorney
that the title was good he wrote to Zehmer that he was ready to close the
deal.
Not only did Lucy actually believe, but the evidence shows he was
warranted in believing, that the contract represented a serious business
transaction and a good faith sale and purchase of the farm.
In the field of contracts, as generally elsewhere, “We must look to the
outward expression of a person as manifesting his intention rather than to
his secret and unexpressed intention. ‘The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.’ ”
First Nat. Exchange Bank of Roanoke v. Roanoke Oil Co., 169 Va. 99, 114,
192 S.E. 764, 770.
At no time prior to the execution of the contract had Zehmer indicated
to Lucy by word or act that he was not in earnest about selling the farm.
They had argued about it and discussed its terms, as Zehmer admitted, for
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CREATING CONTRACTUAL OBLIGATIONS
a long time. Lucy testified that if there was any jesting it was about paying $50,000 that night. The contract and the evidence show that he was
not expected to pay the money that night. Zehmer said that after the writing was signed he laid it down on the counter in front of Lucy. Lucy said
Zehmer handed it to him. In any event there had been what appeared to
be a good faith offer and a good faith acceptance, followed by the execution
and apparent delivery of a written contract. Both said that Lucy put the
writing in his pocket and then offered Zehmer $5 to seal the bargain. Not
until then, even under the defendants’ evidence, was anything said or done
to indicate that the matter was a joke. Both of the Zehmers testified that
when Zehmer asked his wife to sign he whispered that it was a joke so Lucy wouldn’t hear and that it was not intended that he should hear.
The mental assent of the parties is not requisite for the formation of a
contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an
unreasonable meaning which he attaches to his manifestations is known
to the other party. Restatement of the Law of Contracts, Vol. I, § 71, p.
74. . . .
An agreement or mutual assent is of course essential to a valid contract but the law imputes to a person an intention corresponding to the
reasonable meaning of his words and acts. If his words and acts, judged by
a reasonable standard, manifest an intention to agree, it is immaterial
what may be the real but unexpressed state of his mind. C.J.S. Contracts,
§ 32, p. 361; 12 Am.Jur., Contracts, § 19, p. 515.
So a person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he
intended a real agreement. . . .
Whether the writing signed by the defendants and now sought to be
enforced by the complainants was the result of a serious offer by Lucy and
a serious acceptance by the defendants, or was a serious offer by Lucy and
an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties. . . .
The complainants are entitled to have specific performance of the contract sued on. The decree appealed from is therefore reversed and the
cause is remanded for the entry of a proper decree requiring the defendants to perform the contract in accordance with the prayer of the bill.
Reversed and remanded.
NOTES
(1) Questions. Does either the objective or subjective theory alone adequately explain the decision in the case? Did Zehmer believe that Lucy intended to sell the Ferguson Farm? What facts suggest an affirmative answer? Why
is Zehmer’s honest belief alone not sufficient to bind Lucy? What more does
the court require?
The United States Court of Appeals for the Tenth Circuit has stated that “contracts are not formed by comparing mental states; they are formed by what
the parties communicate.” Navair, Inc. v. IFR Americas, 519 F.3d 1131 (2008).
Are there risks in this position? What are its benefits? Recall Jerome Frank’s
questioning of whether such an approach could actually yield the hoped for
certainty and uniformity claimed by the objectivist formula. Can you develop
any practical alternatives?
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(2) Jesting and Bluffing. What result if the price offered for the Zehmer
farm had been $50 rather than $50,000? In Keller v. Holderman, 11 Mich. 248
(1863), Holderman, as a “frolic and banter,” gave Keller a $300 check for a
watch worth about $15. Holderman had no money in the bank and intended to
insert a condition in the check rendering him not liable. This he neglected to
do. Keller sued Holderman on the check and had judgment. Holderman
appealed. Held: Reversed.
“When the Court below found as a fact that ‘the whole transaction between the parties was a frolic and a banter, the plaintiff not expecting to sell,
nor the defendant intending to buy the watch at the sum for which the check
was drawn,’ the conclusion should have been that no contract was ever made
by the parties. . . . ” How does this use of the price differ from that of a peppercorn discussed above at Note 4, p. 39?
In addition to contending that “the whole matter was a joke,” the
Zehmers, in the case above, further contended that the writing “was prepared
as a bluff or dare to force Lucy to admit that he did not have $50,000.” What
result if Lucy, knowing this, had “called their bluff” by raising the money from
his brother? Should a distinction be made between jesting on the one hand,
and bluffing or daring on the other? Are both “jokes”?
(3) The Right Stuff. John Leonard watched a television commercial
touting a range of items (“Pepsi Stuff”) that consumers could acquire by
redeeming “Pepsi Points” obtained by buying specially marked packages of
Pepsi products. The commercial showed a suburban high school student using
various items from the Pepsi collection, with legends identifying each item and
the number of Pepsi Points for which it could be obtained (“SHADES 175
PEPSI POINTS”; “LEATHER JACKET 1450 PEPSI POINTS”), and arriving
at school in a fighter jet. On the same screen as the fighter jet, a similar
legend appeared on the screen, stating “HARRIER JET 7,000,000 PEPSI
POINTS.” Using an official order form, Leonard ordered one Harrier Jet,
enclosing 15 Pepsi Points and a check for $700,000. (Pepsi permitted
consumers to buy additional points for 10 cents a point.) Pepsi did not send
Leonard the Harrier Jet. Instead, it returned Leonard’s check, explaining that
the “Harrier jet in the Pepsi commercial is fanciful and simply intended to
create a humorous and entertaining ad.” Leonard then sued Pepsico, arguing
that it was bound to sell him the Harrier Jet in exchange for the Pepsi Points
and $700,000. Held: For Pepsico.
Noting “the obvious absurdity of the commercial,” the court held that “no
objective person could reasonably have concluded that the commercial actually
offered consumers a Harrier jet. . . . The commercial is the embodiment of
what defendant [Pepsi] appropriately characterizes as ‘zany humor.’ ” “In light
of the Harrier Jet’s well documented function in attacking and destroying
surface and air targets, . . . depiction of such a jet as a way to get to school in
the morning is clearly not serious. . . . ” Leonard v. Pepsico, 88 F.Supp.2d 116,
129 (S.D.N.Y.1999), aff’d 210 F.3d 88 (2d Cir. 2000).
Do you agree? What result in the Pepsico case under Lucy? The court in
Leonard, noting that the price of a Harrier jet is roughly 23 million dollars,
stated that “[e]ven if an objective, reasonable person were not aware of this
fact, he would conclude that purchasing a fighter plane for $700,000 is a deal
too good to be true.” Id. Is a price too good to be true always an indication that
no offer has been made?
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CREATING CONTRACTUAL OBLIGATIONS
(4) Proving Subjective Intent. If a party’s subjective intent is to play any
role in contract law, how is that intent to be proved? As Grant Gilmore explained, “If . . . the actual state of the parties’ minds is relevant, then each litigated case must become an extended factual inquiry into what was ‘intended,’
‘meant,’ ‘believed,’ and so on. If, however, we can restrict ourselves to the ‘externals’ (what the parties ‘said’ or ‘did’), then the factual inquiry will be much
simplified.” Gilmore, The Death of Contract 42 (1974).
Contract law’s preference for the objective has not, however, completely
solved the problem of proof. Suppose, for example, that Lucy had actually
known that the Zehmers were joking even though this was not objectively
apparent. Does this mean that a witness’s testimony as to intent simply goes
unchallenged? A number of safeguards suggest that the answer is No. These
include: the availability of pretrial discovery to reveal prior inconsistent
statements or other such evidence; confidence in a jury’s ability to discern
when a witness is untruthful; and the fact that the person whose intent is at
issue may well be a corporation or other organization leading to the possibility
of conflicting sources of information regarding intent, such as testimony from
disaffected former employees or email trails.
For the argument that the application of subjective intent “brings the
formation of contracts into harmony with the rules governing contract interpretation, consideration, and gap-filling,” see Lawrence Solan, Contract as
Agreement, 83 Notre Dame L. Rev. 353 (2007).
Specht v. Netscape Communications Corp.
United States Court of Appeals, Second Circuit, 2002.
306 F.3d 17.
■ SOTOMAYOR, CIRCUIT JUDGE.d This is an appeal from a judgment of the
Southern District of New York denying a motion by defendants-appellants
Netscape Communications Corporation and its corporate parent, America
Online, Inc. (collectively, “defendants” or “Netscape”), to compel arbitration and to stay court proceedings. In order to resolve the central question
of arbitrability presented here, we must address issues of contract formation in cyberspace. Principally, we are asked to determine whether
plaintiffs-appellees (“plaintiffs”), by acting upon defendants’ invitation to
download free software made available on defendants’ webpage, agreed to
be bound by the software’s license terms (which included the arbitration
clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had
scrolled down the webpage to a screen located below the download button.
We agree with the district court that a reasonably prudent Internet user
in circumstances such as these would not have known or learned of the
existence of the license terms before responding to defendants’ invitation
to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs’ bare
act of downloading the software did not unambiguously manifest assent to
the arbitration provision contained in the license terms.
d
Sonia Sotomayor (1954–____) became an Associate Justice of the Supreme Court in
2009, having served on the United States Court of Appeals for the Second Circuit (1998–
2009) and on the United States District Court for the Southern District of New York (1991–
1998). She received her J.D. from Yale Law School in 1979, and began her career as an Assistant District Attorney in the New York County District Attorney’s Office (1979–1984).
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BACKGROUND
I.
Facts
In three related putative class actions, plaintiffs alleged that,
unknown to them, their use of SmartDownload transmitted to defendants
private information about plaintiffs’ downloading of files from the
Internet, thereby effecting an electronic surveillance of their online
activities in violation of two federal statutes, the Electronic
Communications Privacy Act, 18 U.S.C. §§ 2510 et seq., and the Computer
Fraud and Abuse Act, 18 U.S.C. § 1030.
In the time period relevant to this litigation, Netscape offered on its
website various software programs, including Communicator and
SmartDownload, which visitors to the site were invited to obtain free of
charge. It is undisputed that five of the six named plaintiffs—Michael
Fagan, John Gibson, Mark Gruber, Sean Kelly, and Sherry Weindorf—
downloaded Communicator from the Netscape website. These plaintiffs
acknowledge that when they proceeded to initiate installation of
Communicator, they were automatically shown a scrollable text of that
program’s license agreement and were not permitted to complete the
installation until they had clicked on a “Yes” button to indicate that they
accepted all the license terms.1 If a user attempted to install
Communicator without clicking “Yes,” the installation would be aborted.
All five named user plaintiffs expressly agreed to Communicator’s license
terms by clicking “Yes.” The Communicator license agreement that these
plaintiffs saw made no mention of SmartDownload or other plug-in
programs, and stated that “[t]hese terms apply to Netscape Communicator
and Netscape Navigator” and that . . . “all disputes relating to this
Agreement (excepting any dispute relating to intellectual property rights)”
are subject to “binding arbitration in Santa Clara County, California.”
Although Communicator could be obtained independently of
SmartDownload, all the named user plaintiffs, except Fagan, downloaded
and installed Communicator in connection with downloading
SmartDownload. Each of these plaintiffs allegedly arrived at a Netscape
webpage captioned “SmartDownload Communicator” that urged them to
“Download With Confidence Using SmartDownload!” At or near the bottom of the screen facing plaintiffs was the prompt “Start Download” and a
tinted button labeled “Download.” By clicking on the button, plaintiffs initiated the download of SmartDownload. Once that process was complete,
SmartDownload, as its first plug-in task, permitted plaintiffs to proceed
with downloading and installing Communicator, an operation that was
accompanied by the clickwrap display of Communicator’s license terms
described above.
The signal difference between downloading Communicator and downloading SmartDownload was that no clickwrap presentation accompanied
the latter operation. Instead, once plaintiffs Gibson, Gruber, Kelly, and
Weindorf had clicked on the “Download” button located at or near the bottom of their screen, and the downloading of SmartDownload was complete,
these plaintiffs encountered no further information about the plug-in pro1
This kind of online software license agreement has come to be known as “clickwrap”
because it “presents the user with a message on his or her computer screen, requiring that
the user manifest his or her assent to the terms of the license agreement by clicking on an
icon. The product cannot be obtained or used unless and until the icon is clicked.” Specht, 150
F.Supp.2d at 593–94 (footnote omitted).
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CREATING CONTRACTUAL OBLIGATIONS
gram or the existence of license terms governing its use. The sole reference
to SmartDownload’s license terms on the “SmartDownload Communicator”
webpage was located in text that would have become visible to plaintiffs
only if they had scrolled down to the next screen.
Had plaintiffs scrolled down instead of acting on defendants’ invitation to click on the “Download” button, they would have encountered the
following invitation: “Please review and agree to the terms of the Netscape
SmartDownload software license agreement before downloading and using
the software.” . . .
Even for a user who, unlike plaintiffs, did happen to scroll down past
the download button, SmartDownload’s license terms would not have been
immediately displayed in the manner of Communicator’s clickwrapped
terms. Instead, if such a user had seen the notice of SmartDownload’s
terms and then clicked on the underlined invitation to review and agree to
the terms, a hypertext link would have taken the user to a separate
webpage entitled “License & Support Agreements.” The first paragraph on
this page read, in pertinent part:
The use of each Netscape software product is governed by a license
agreement. You must read and agree to the license agreement terms BEFORE acquiring a product. Please click on the appropriate link below to
review the current license agreement for the product of interest to you before acquisition. For products available for download, you must read and
agree to the license agreement terms BEFORE you install the software. If
you do not agree to the license terms, do not download, install or use the
software.
Below this paragraph appeared a list of license agreements, the first
of which was “License Agreement for Netscape Navigator and Netscape
Communicator Product Family (Netscape Navigator, Netscape Communicator and Netscape SmartDownload).” If the user clicked on that link, he
or she would be taken to yet another webpage that contained the full text
of a license agreement that was identical in every respect to the Communicator license agreement except that it stated that its “terms apply to
Netscape
Communicator,
Netscape
Navigator,
and
Netscape
SmartDownload.” The license agreement granted the user a nonexclusive
license to use and reproduce the software, subject to certain terms. Among
the license terms was a provision requiring virtually all disputes relating
to the agreement to be submitted to arbitration.
DISCUSSION
I.
Standard of Review and Applicable Law
A district court’s denial of a motion to compel arbitration is reviewed
de novo. The determination of whether parties have contractually bound
themselves to arbitrate a dispute—a determination involving interpretation of state law—is a legal conclusion also subject to de novo review. The
findings upon which that conclusion is based, however, are factual and
thus may not be over-turned unless clearly erroneous. . . . The district
court properly concluded that in deciding whether parties agreed to arbitrate a certain matter, a court should generally apply state-law principles
to the issue of contract formation. . . . The district court further held that
California law governs the question of contract formation here; the parties
do not appeal that determination. [citations omitted]
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CHAPTER 2
III. Whether the User Plaintiffs Had Reasonable Notice of and Manifested Assent to the SmartDownload License Agreement
Whether governed by the common law or by Article 2 of the Uniform
Commercial Code (“UCC”), a transaction, in order to be a contract, requires a manifestation of agreement between the parties. . . . California’s
common law is clear that “an offeree, regardless of apparent manifestation
of his consent, is not bound by inconspicuous contractual provisions of
which he is unaware, contained in a document whose contractual nature is
not obvious.” Id. . . .
Arbitration agreements are no exception to the requirement of manifestation of assent. “This principle of knowing consent applies with particular force to provisions for arbitration.” Windsor Mills, 101 Cal.Rptr. at
351. Clarity and conspicuousness of arbitration terms are important in
securing informed assent. “If a party wishes to bind in writing another to
an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly
comprehend that the agreement to arbitrate exists and binds the parties
thereto.” Commercial Factors Corp. v. Kurtzman Bros., 131 Cal.App.2d
133, 134–35, 280 P.2d 146, 147–48 (1955). Thus, California contract law
measures assent by an objective standard that takes into account both
what the offeree said, wrote, or did and the transactional context in which
the offeree verbalized or acted.
A. The Reasonably Prudent Offeree of Downloadable Software
Defendants argue that plaintiffs must be held to a standard of reasonable prudence and that, because notice of the existence of
SmartDownload license terms was on the next scrollable screen, plaintiffs
were on “inquiry notice” of those terms. We disagree[.] It is true that “[a]
party cannot avoid the terms of a contract on the ground that he or she
failed to read it before signing.” Marin Storage & Trucking, 89 Cal.App.4th
at 1049, 107 Cal.Rptr.2d at 651. But courts are quick to add: “An exception
to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such
a case, no contract is formed with respect to the undisclosed term.” Id.
Most of the cases cited by defendants in support of their inquirynotice argument are drawn from the world of paper contracting. See, e.g.,
Taussig v. Bode & Haslett, 134 Cal. 260, 66 P. 259 (1901) (where party
had opportunity to read leakage disclaimer printed on warehouse receipt,
he had duty to do so); In re First Capital Life Ins. Co., 34 Cal.App.4th
1283, 1288, 40 Cal.Rptr.2d 816, 820 (1995) (purchase of insurance policy
after opportunity to read and understand policy terms creates binding
agreement). . . ; King v. Larsen Realty, Inc., 121 Cal.App.3d 349, 356, 175
Cal.Rptr. 226, 231 (1981) (where realtors’ board manual specifying that
party was required to arbitrate was “readily available,” party was “on notice” that he was agreeing to mandatory arbitration); Cal. State Auto.
Ass’n Inter–Ins. Bureau v. Barrett Garages, Inc., 257 Cal.App.2d 71, 76,
64 Cal.Rptr. 699, 703 (1967) (recipient of airport parking claim check was
bound by terms printed on claim check, because a “ordinarily prudent”
person would have been alerted to the terms).
As the foregoing cases suggest, receipt of a physical document containing contract terms or notice thereof is frequently deemed, in the world
of paper transactions, a sufficient circumstance to place the offeree on inquiry notice of those terms. “Every person who has actual notice of circum-
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CREATING CONTRACTUAL OBLIGATIONS
stances sufficient to put a prudent man upon inquiry as to a particular
fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.” Cal.Civ.Code § 19.
These principles apply equally to the emergent world of online product
delivery, pop-up screens, hyperlinked pages, clickwrap licensing, scrollable
documents, and urgent admonitions to “Download Now!”. What plaintiffs
saw when they were being invited by defendants to download this fast,
free plug-in called SmartDownload was a screen containing praise for the
product and, at the very bottom of the screen, a “Download” button. Defendants argue that under the principles set forth in the cases cited above,
a “fair and prudent person using ordinary care” would have been on inquiry notice of SmartDownload’s license terms. Shacket, 651 F.Supp. at
690.
We are not persuaded that a reasonably prudent offeree in these circumstances would have known of the existence of license terms. Plaintiffs
were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms. . . . Moreover, the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been
aware that an unexplored portion of the Netscape webpage remained below the download button does not mean that they reasonably should have
concluded that this portion contained a notice of license terms. . . . Plaintiffs testified, and defendants did not refute, that plaintiffs were in fact
unaware that defendants intended to attach license terms to the use of
SmartDownload.
We conclude that in circumstances such as these, where consumers
are urged to download free soft-ware at the immediate click of a button, a
reference to the existence of license terms on a submerged screen is not
sufficient to place consumers on inquiry or constructive notice of those
terms.
C. Online Transactions
. . . After reviewing the California common law and other relevant legal
authority, we conclude that under the circumstances here, plaintiffs’
downloading of SmartDownload did not constitute acceptance of defendants’ license terms. Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by
consumers are essential if electronic bargaining is to have integrity and
credibility. We hold that a reasonably prudent offeree in plaintiffs’ position
would not have known or learned, prior to acting on the invitation to
download, of the reference to SmartDownload’s license terms hidden below
the “Download” button on the next screen. We affirm the district court’s
conclusion that the user plaintiffs, including Fagan, are not bound by the
arbitration clause contained in those terms.
CONCLUSION
For the foregoing reasons, we affirm the district court’s denial of defendants’ motion to compel arbitration and to stay court proceedings.
NOTES
(1) Questions. What action was argued by Netscape to constitute assent in
Specht? Can a keystroke ever constitute a party’s intent to be bound? How
does the plaintiffs’ challenge to its assent in Specht differ with the seller’s
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CREATING CONTRACTUAL OBLIGATIONS
CHAPTER 2
challenge to assent in Lucy v. Zehmer? Does it matter that the party disputing
their assent is the offeror in one case, and the offeree in the other?
Recall that in Lucy, the question was whether there was a contract at all. In
this case, there was apparently no doubt that there was a contract for the deal
as a whole; the question, instead, was whether Specht agreed to a particular
term. What is the significance of the difference?
(2) Inquiry Notice. Must an “offeree of downloadable software,” as the court
describes the plaintiffs, have actually read the terms of the deal before clicking
can constitute assent? According to Specht, what does it take to bind a person
who clicks on “I agree.”? Compare Netscape’s presentation of terms in Specht
from a procedure where the seller’s technician showed the buyer the terms on
the technician’s laptop, and the buyer was unable to complete the transaction
without clicking on one of three boxes (“Exit Registration,” “I Accept,” or “I
Reject”) located under the Terms of Service, see Hancock v. AT & T, (10th Cir.,
2012) (available at http://www.ca10.uscourts.gov/opinions/11/11–6233.pdf).
Would you find intent by an offeree who clicks on “I Accept” in the latter case?
———
ASSENT AND EXPRESS LIMITATIONS ON THE INTENT TO
BE BOUND
Certain cases in the last chapter were presented as if parties made
deals without much fuss: Hawkins agreed to the hand surgery; Story, Jr.
forebore from vice. Yet some negotiation is a common precursor to most
agreements, even seemingly straightforward ones. (Recall that Dr. McGee
really wanted to practice the surgery on Hawkins, and so sweetened the
deal to secure consent.) For more complex deals—the acquisition of companies, real estate developments, divorce settlements—negotiations are
usually more protracted and may take shape over an extended period of
time. Negotiating parties in these transactions may want to record, or
perhaps lock in, terms that have been agreed upon, yet not be contractually bound to that term until a final agreement is reached, and often not until that agreement takes formal written form. During this transactional
process, it is therefore important to ask: even when parties have assented,
just what have they have agreed to?
“Mutual assent has many implications for contract law theory and
doctrine. Importantly, it sets the boundary between the precontractual
and the contractual stages. Prior to attaining a consensus, while an
agreement is still being negotiated, no liability arises between the parties.
At some point in time, the positions of the parties (or, more correctly, their
outward manifestations) meet, and full expectation liability emerges.”
Omri Ben–Shahar, “Contracts without Consent: Exploring a New Basis for
Contractual Liability,” 152 U. Penn. L. Rev. 1829 (2004). Assent is a necessary condition for contractual liability, but it is not sufficient. For example, let’s say that two parties agree on what they consider to be the essential terms of a contract, leaving the details to be worked out by their lawyers in a final, formal document that the parties expect to sign. If one of
the parties then refuses to sign the formal document, can the other enforce
their agreement?
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The answer depends on whether the parties intended to conclude
their agreement at the earlier point in time. In that regard, courts have
developed two widely-accepted common law principles:
(a) that absent an expressed intent that no contract shall exist,
mutual assent between the parties, even though oral or informal, to
exchange acts or promises is sufficient to create a binding contract;
and (b) that to avoid the obligation of a binding contract, at least one
of the parties must express an intention not to be bound until a writing is executed.
Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 570 (2d
Cir.1993).
But how does a court determine whether or not a party has sufficiently expressed an intention not to be bound in the absence of a formal document? In Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d
Cir.1985), the court listed “several factors that help.” These factors are:
(1) whether there has been an express reservation of the right not to
be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the
alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to
writing.
Id. at 80. Despite such guidance, cases involving this question are frequently before the courts. For two classic discussions, see Charles Knapp,
Enforcing the Contract to Bargain, 44 N.Y.U. L. Rev. 673 (1969) and E.
Allan Farnsworth, Precontractual Liability and Preliminary Agreements:
Fair Dealing and Failed Negotiations, 87 Colum.L.Rev. 217 (1987).
Other forms of precontractual commitment include “gentlemen’s
agreements” and letters of intent.e We will engage with letters of intent
more fully on p. 252 in connection with precontractual liability; for now it
is enough to consider them along the lines of “agreements in principle” in
which negotiating parties keep a record of, or memorialize, matters on
which accord has been reached. At the same time, letters of intent typically include language that seeks to prevent the letter from signaling an intent to be bound, such as “This letter is not intended to create nor should
it be construed as creating any legal obligation.” White Construction Co. v.
Martin Marietta Materials, 633 F. Supp.2d 1302 (M.D.Fla. 2009).
Let us consider one further form of preliminary agreement, an
agreement to negotiate. May parties bind themselves not to a particular
term, but to the process of achieving the terms? The answer is Yes. As one
court stated, in a contract to negotiate,
the parties exchange promises to conform to a specific course of conduct during negotiations, such as negotiating in good faith, exclusively with each other, or for a specific period of time. Under a contract to negotiate, the parties do not intend to be bound if negotiations fail to reach ultimate agreement on the substantive deal . . .
[N]o breach occurs if the parties fail to reach agreement on the sub-
e
“A gentlemen’s agreement is . . . an agreement which is not an agreement, made between two persons neither of whom is a gentleman, whereby each expects the other to be
strictly bound without himself being bound at all.” Wilma Fall, Letters of Comfort, 1990 J. S.
Afr. L. 73 (1990) (quoting Chemo Leasing v. Rediffusion, 1 FTLR 201 CA, (1987)).
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CHAPTER 2
stantive deal. The contract to negotiate is breached only when one
party fails to conform to the specific course of conduct agreed upon.
Keystone Land & Development Co. v. Xerox Corp., 94 P.3d 945 (Wash.,
2004). How does a contract to negotiate differ from an “agreement to
agree,” defined by the court in Keystone Land as “an agreement to do
something which requires a further meeting of the minds of the parties
and without which it would not be complete”?
NOTES
(1) Open Term Agreements. In an influential case further treating the factors in Winston, Judge Pierre Leval distinguished between two types of binding preliminary agreements, now designated as “Tribune I” and “Tribune II.”
Teachers Insurance & Annuity Association v. Tribune Co., 670 F.Supp. 491
(S.D.N.Y.1987). The two types have been described as follows.
A Tribune Type I contract “is created when the parties agree on all the
points that require negotiation (including whether to be bound) but agree to
memorialize their agreement in a more formal document. Such an agreement
is fully binding; it is ‘preliminary in form—only in the sense that the parties
desire a more elaborate formalization of the agreement. . . . [I]t binds both
sides to their ultimate contractual objective in recognition that, ‘despite the
anticipation of further formalities,’ a contract has been reached. . . . ”
In contrast, a Tribune Type II contract, “dubbed a ‘binding preliminary
commitment,’ . . . is created when the parties agree on certain major terms,
but leave other terms open for further negotiation.” A Type II agreement “
‘does not commit the parties to their ultimate contractual objective but rather
to the obligation to negotiate the open issues in good faith toward a final contract’ ” Adjustrite Systems v. GAB Business Services, 145 F.3d 543, 548 (2d
Cir.1998).
Some courts have sought to distinguish between open terms that are
“deal breakers” and those that are not. See A/S Apothekernes Laboratorium v.
I.M.C. Chemical, 873 F.2d 155 (7th Cir.1989). How might a party make certain, throughout negotiations, that every open term is a deal breaker? See
Budget Marketing, Inc. v. Centronics Corp., 927 F.2d 421 (8th Cir.1991).
(2) Of Oil and Honor. One celebrated case involving “formal contract contemplated” was a so-called “handshake deal” between the Pennzoil Company
and the Getty Oil Company. Getty, having negotiated a sale of stock to Pennzoil, refused to perform and sold the stock to Texaco, Inc. Pennzoil’s first legal
sally was an attempt to charge Getty with breach of contract in Delaware.
When that failed, Pennzoil shifted its ground to Texas and sued Texaco there
for interfering with the alleged Getty contract. This action produced a verdict
against Texaco for $10.53 billion and (after much maneuvering, including a
reduction of $2 billion in the jury’s punitive-damage award and a visit to the
Supreme Court of the United States) led to Texaco’s bankruptcy. Its bankruptcy petition was designed to effectuate a $3 billion settlement agreement between the parties. For a description of the Pennzoil–Getty dealings see Texaco,
Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex.App.1987). See also T. Petzinger, Oil
and Honor: The Texaco–Pennzoil Wars (1987).
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CREATING CONTRACTUAL OBLIGATIONS
INTENT IN CONTEXT
Lucy v. Zehmer, above, suggests that a promisor may not be bound if
the promise, whether from its content or from the circumstances of its
making, is insufficiently sincere to indicate the promisor’s intent to be
bound. In addition to disregarding jests, courts and sometimes legislatures
are also reluctant to enforce a statement on the ground that no binding
promise was intended. One area where this reluctance is observed,
touched upon in Chapter 1, concerns optimistic statements made by doctors to patients. See Note 2, p. 3 above. In an omitted passage from Sullivan v. O’Connor, p. 15 the court observed that “patients may transform
such statements into firm promises in their own minds. . . . ” Statements
made for social purposes or among family members provide a second category in which the promisor may not have intended to make a legally enforceable promise.
In thinking further about the nature or quality of assent necessary to
make a promise binding, consider Professor Edwin Patterson’sf suggestion
that:
A good legal rule as to the enforceability of promises should make
contracting available to non-lawyers who will take the pains to clarify their ideas as to what they want to contract about; yet it should
not make contracting so easy that it hooks the unwary signer or the
casual promisor. The first may be called freedom to contract, the second, freedom from contract. These are, of course, counsels of perfection.
NOTES
(1) Dining Together. Should a court enforce a promise made for a social
purpose, such as a promise to be a guest at a dinner party? Would it make a
difference if the host had gone to considerable expense to make elaborate
preparations in honor of the guest? What if the broken promise was one to
marry and the plaintiff’s expenses had included a wedding dress and the rental of a hall for the reception? See Ferraro v. Singh, 495 A.2d 946
(Pa.Super.1985).
(2) Hunting Together. Two friends, Mitzel and Hauck, went duck hunting
in a car driven by Hauck. While taking a curve on a country road at 74 miles
per hour, Hauck lost control and crashed the car, injuring Mitzel, who then
sued Hauck. South Dakota law provides that “no person transported . . . as a
guest” has a cause of action against the driver for negligence. Mitzel testified
that he was not a guest: “I told him I would accompany him on this trip to look
for ducks. I would take my time and go along on this trip and look for ducks on
the agreement he would take the car.” From a judgment for Hauck, plaintiff
appealed. Held: For Hauck.
“It is not every agreement that results in a binding, legally enforceable
contract. Neither party may intend the writing to be a contract; it must contemplate the assumption of legal rights and duties. . . . This is not to say . . .
that contracts may not be implied in fact or in law . . . [Yet to] spell out a conf
Edwin W. Patterson (1889–1965) practiced for four years in Kansas City and then
taught at Texas, Colorado, Iowa and Columbia. He was one of the Advisers for the Restatement of Restitution. Among his writings are books on contracts, insurance and jurisprudence,
including four editions of the predecessor of this casebook.
139